Design of extended warranties in supply chains under additive demand

Kunpeng Li, Suman Mallik, Dilip Chhajed

Research output: Contribution to journalArticlepeer-review


We study the design of extended warranties in a supply chain consisting of a manufacturer and an independent retailer. The manufacturer produces a single product and sells it exclusively through the retailer. The extended warranty can be offered either by the manufacturer or by the retailer. The party offering the extended warranty decides on the terms of the policy in its best interest and incurs the repair costs of product failures. We use game theoretic models to answer the following questions. Which scenario leads to a higher supply-chain profit, the retailer offering the extended warranty or the manufacturer? How do the optimum price and extended warranty length vary under different scenarios? We find that, depending on the parameters, either party may provide better extended warranty policies and generate more system profit. We also compare these two decentralized models with a centralized system where a single party manufactures the product, sells it to the consumer, and offers the extended warranty. We also consider an extension of our basic model where either the manufacturer or the retailer resells the extended warranty policies of a third party (e.g., an independent insurance company), instead of offering its own policy.

Original languageEnglish (US)
Pages (from-to)730-746
Number of pages17
JournalProduction and Operations Management
Issue number4
StatePublished - Jul 2012


  • extended warranty
  • game theory
  • supply chain management
  • warranty

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation


Dive into the research topics of 'Design of extended warranties in supply chains under additive demand'. Together they form a unique fingerprint.

Cite this