Abstract: With decreasing profit margins on durable products, extended warranty has become an important profitability source. In such a case, manufacturers, retailers or the both may sell extended warranties to achieve high marginal profits. In this paper, the optimal extended warranty price and product price as well as the impact of warranty service on base warranty in a supply chain are examined. To address such challenging issues, a supply chain consisting of a manufacturer and a retailer is considered. The manufacturer produces a product bundled with a base warranty and sells it through the retailer. The extended warranty can be offered by the manufacturer, the retailer or both. Specifically, in the last case, consumers may prefer to extended warranty provided by the manufacturer or the retailer. Theoretical models in the three scenarios are developed by using game theory. The results show that who offering extended warranty depends on warranty cost. When extended warranty is provided by a single entity, extended warranty has a positive (or negative) effect on base warranty if extended warranty is only provided by the manufacturer (or the retailer) and it is beneficial for both members when extended warranty offered only by the manufacturer. When both players providing extended warranty, warranty competition leads to reduce extended warranty price; and when consumers prefer to a player's extended warranty, its price is higher than that of the other. In this case, the interaction between the base warranty and the extended warranty depends on the competition level. In particular, when consumers prefer to the manufacturer's extended warranty, both players' profits are relatively stable and higher than those when only one player offers the service. Our findings can provide theoretical supports for practical warranty service management and can further enrich related research.

Key words: base warranty, extended warranty, supply chain, interaction