The Demand for Service Contracts

The Magnuson-Moss Warranty-Federal Trade Commission Improvement Act of 1975 for the first time explicitly provided the federal government with the legislative authority to regulate warranties on goods and services. The Act provided for the regulation of the form and some of the terms and language used in warranties (Gerner and Bryant 1976; Heaton and Katz 1978; Heaton, Katz, and Adam 1978). The attention paid to warranties, however, has also created interest in substitutes for written warranties, among which is the service contract. While the service contract has been used not as a substitute for a written warranty but rather as an option available on the expiration of the warranty, there is little question that under appropriate conditions manufacturers would offer service contracts in place of warranties. An appliance service contract typically provides repair service, specified maintenance service, preventive checkups, and may provide specified consequential damages. Service contracts have been available for many years on some products. However, their widespread