Two-attribute warranty policies under consumer preferences of usage and claims execution

Warranty policies for certain products, such as automobiles, often involve consideration of two attributes, for example, time and usage. Since consumers are not necessarily homogeneous in their use of the product, such policies provide protection to users of various categories. In this chapter, product usage at a certain time is linked to the product age through a variable defined as usage rate. This variable, usage rate, is assumed to be a random variable with a specified probability distribution, which permits modeling of a variety of customer categories. Another feature of the chapter is to model the propensity to execute the warranty, in the event of a failure within specified parameter values (say time or usage). In a competitive market, alternative product/warranty offerings may reduce the chances of exercising the warranty. This chapter investigates the impact of warranty policy parameters with the goal of maximizing market share, subject to certain constraints associated with expected warranty costs per unit not exceeding a desirable level.