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Journal of the Operational Research Society (2007) 58, 1612 --1620 2007 Operational Research Society Ltd. All rights reserved. 0160-5682/07 $30.00
/jors
A flexible extended warranty and related
optimal strategies
N Jack1∗ and DNP Murthy2
1 University of Abertay, Dundee, Scotland; and 2 University of Queensland, Brisbane, Australia
The choice of extended warranties (EWs) currently available to consumers is extremely limited. Their EW
purchase decisions have to be made at or very close to the time that they purchase the products and, at this
point, they are uncertain about item reliability, future operating costs, and usage time before replacement. In
this paper, we discuss an EW that offers more flexibility and we investigate optimal pricing strategies for the
EW provider and optimal maintenance and replacement strategies for the consumer.
Journal of the Operational Research Society (2007) 58, 1612–1620. doi:10.1057/palgrave.jors.2602326
Published online 22 November 2006
Keywords: warranty; maintenance and replacement strategies; stochastic models; game theory
Introduction when consumers vary in risk attitude and consumer moral
In recent years, warranties have become an important part hazard is also present. Lutz and Padmanabhan (1994) look
at income variation, and Padmanabhan (1995) and Hollis
of sales transactions for many types of item ranging from
consumer durables to industrial and commercial products. A (1999) investigate the effect of heterogeneity in consumer us-
‘base’ warranty (BW) is a contractual agreement between an age. Differences in consumers’ valuations of a
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