Warranty and Bundling Strategies for Pricing Decisions in a Duopoly

Abstract

This study examines pricing decisions by considering two manufacturers’ warranty and bundling strategies using spatial competition in a duopolistic market. With the development of advanced technology and evolving societal needs, manufacturers now sell a product with its complement—a warranty—using either a bundled base warranty or an unbundled extended warranty strategy. To investigate the impact of the bundling strategy on warranty and pricing models, we develop two scenarios for the pure bundling and mixed bundling scenarios. By constructing a Nash equilibrium model and assessing customer preferences, we determine the optimal warranty length and level of customer demand corresponding to a manufacturer’s pricing and strategic decisions. The analysis demonstrates that one manufacturer’s strategic decisions are interdependent with those of its competitor. Moreover, a longer warranty period in the unbundled extended warranty strategy not only attracts customers and increases demand but also imposes additional costs on manufacturers. As a result, while providing more personalized features and flexibility, the unbundled extended warranty strategy is not always more profitable. Thus, a manufacturer must carefully evaluate its warranty and bundling strategies when making pricing decisions to gain a competitive advantage. Finally, numerical and sensitivity analyzes confirm the results of the theoretical analysis and provide managerial insights.

Keywords

• Customer preferences
• duopolistic market
• extended warranty
• game theory
• Nash equilibrium
• spatial competition