Warranty Signalling and Reputation

Subramanian Balachander

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Consumer Market Behavior and Pricing Merger and Competition Analysis Supply Chain and Inventory Management

Abstract

In this paper, we present a signalling-based explanation for the empirical phenomenon that a longer warranty may be offered by a product with lower quality. Our explanation hinges on differences in consumer knowledge about reliability of established and newer products. In a product market where a new entrant competes with an established product, we show that signalling behavior leads to an outcome where the less reliable product may carry the longer warranty.

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1988The Theory of Industrial Organization 1989Theory of Industrial Organization.1974Advertising as Information 1987Signaling Games and Stable Equilibria 1989Quantity precommitment and Bertrand competition yield Cournot outcomes 1983Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes 1977Consumer Misperceptions, Product Failure and Producer Liability 1995Signaling Quality with a Money-Back Guarantee: The Role of Transaction Costs

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