Research on Warranties for Different Components in an Open Vertically Integrated Supply Chain

How to set proper warranty lengths for different components is a common problem for manufacturers who produce end products when pricing. This study investigates a pricing game between a vertically integrated manufacturer and an exterior end-product manufacturer with the vertically integrated manufacturer acting as the leader. The two manufacturers set different warranty lengths for the key component and the product without the key component respectively. We assume that customers perceive product quality through warranty lengths of different components and brand reputations of the manufacturers. The result shows that the manufacturer with a higher brand reputation has an incentive to set a longer warranty length. However, due to the impact of the cost coefficient of warranty service, there exist intervals of brand reputation in which the manufacturer provides a shorter warranty length for the key component or the product without the key component than the competitor even though the brand reputation of him is higher. And the best choice for the vertically integrated manufacturer is to increase the key component wholesale price and keep the end product sale price unchanged when the brand reputation of the exterior end-product manufacturer gets stronger. Interestingly, the higher the brand reputation of the exterior end-product manufacturer, the more the profit of the vertically integrated manufacturer. Several numerical examples and managerial insights are presented and used in this paper