Pro-Rata Warranty pricing model with risk-averse manufacturers Mahdi Nasrollahi

Abstract

Due to fierce competition and customer demand, manufacturers have started selling products with different warranty policies and pro-rata warranty is one of the most widely used warranty policy. In this paper we propose a warranty model for pro-rata, fixed period warranty policy with risk averse manufacturer that determines optimal warranty price under inflationary condition.This model has been proposed for products with time dependent failure intensity with Non homogeneous Poisson’s process for failure intensity function, and concave utility function. Using the exponential utility function, the decision model is developed to maximize the manufacturer’s certainty profit equivalent. Risk preference model is developed to find the optimal warranty price through the use of the manufacturer’s utility function for profit. Finally, the sensitivity of the warranty price models is analyzed using numerical examples with respect to such factors as (1) the manufacturer's risk preferences, (2) product failure rate parameters, (3) warranty period length, and (4) inflation and discount rate

Keywords

• pro rata warranty
• risk preferences
• warranty price
• product failure rate
• and inflation