Warranty Scope and Reliability Under Imperfect Information and Alternative Market Structures

Abstract

Modern society offers consumers a wide variety of durable goods which possess complex characteristics. These characteristics are imbedded in the products and affect the flow of services provided. Safety, durability, and reliability are important examples of such characteristics. Because of the technical complexity of many modern consumer goods, these quality features display differences. Also, because of the inherent complexity of the service provided by some consumer goods, the performance of any product is difficult to assess and is partly the consequence of individual actions. As a result, evaluation of these characteristics is a costly process and in a given market situation information will be There have been three types of responses to this problem. The first is to legislate minimum quality features, as the FDA has done. This paper presents an economic analysis of warranties when consumer information regarding product liability is imperfect. It deals specifically with the supply of reliability and its relationship with voluntary liability (warranty). The market system generally provides a more appropriate solution than is usually thought of. Even though some difficulties are still present, their nature is such that regulation may not be necessary and the supply of additional information may produce adverse effects. The effect of market structure on the supply of reliability and warranty is examined; it is found that a monopolist will not alter the levels of these variables compared to the competitive market solution. Finally, while a market solution does not produce unambiguous results, the preliminary empirical evidence presented suggests that market forces alone may bring optimality. * This paper is based on research conducted in association with the Center for Policy Alternatives, Massachusetts Institute of Technology under a grant from the National Science Foundation's Research Applied to National Needs (RANN) program. Additional support was provided by the Consumers and Corporate Affairs Department of the government of Canada. The opinions, findings, conclusions, or recommendations expressed herein are those of the authors and do not necessarily reflect the views of the Center for Policy Alternatives, the National Science Foundation, or the Canadian government. We are indebted to Keith Bryant, Stewart Butler, Marshall Freimer, Jennifer Gerner, Walter Oi, John Pettengill, and an anonymous reviewer for helpful comments on an earlier draft.

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