Determination of the price for free repair warranty policy for a second-hand product with considering the buyer’s risk attitude

Abstract

A warranty for a second-hand product is a contractual obligation offered by the dealer in connection with the sale of the product. Determination of warranty cost for second-hand products is extremely complex due to uncertainties with age, usage and past maintenance history. Pricing for warranty cover linked to sale of second-hand products is not only dependant on the failure characteristics and warranty policy but also the amount the buyer is willing to pay depending on buyer’s risk attitude. A dealer is expected to maximize profit which depends on volume of sale, price and expected cost to service warranty claims based on warranty policy. In this paper, a free repair warranty is considered with sale, under which the customer can have the product repaired free of charge if it fails during the warranty period. It is assumed that’s buyers of the used items are heterogeneous with a random risk-aversion parameter in their risk attitudes towards a warranty price and uncertain repair costs. This paper proposes mathematical model on warranty cost to build into price for the sale of second-hand product based on a utility model which maximizes the dealer’s expected profit