Exclusivity Restrictions in Markets with Adverse Selection: The Case of Extended Warranties

This paper investigates whether the contractual exclusion of third-party extended warranties should be legally permissible, using a model incorporating consumer heterogeneity. The welfare effects of competition in the market for extended warranties are shown to depend on the degree of competition in the product market. In contrast to the approach typically adopted by the courts, the paper argues that manufacturers should not generally be permitted to practice requirements contracting in extended warranties, even when the product market is competitive.