Warranty Transferability and Pricing in the Presence of P2P Secondary Market

Abstract

Manufacturers compete with used products in the secondary market, where original owners possess private quality information that is not observable to potential buyers. This situation creates warranty transferability challenges and influences consumer purchasing and holding behaviors. Despite its practical importance, existing literature has insufficiently addressed this issue. This paper examines a manufacturer selling a durable good with a limited lifetime over an infinite horizon, developing a dynamic framework that addresses cannibalization and value-added effects influenced by warranty and pricing decisions. The manufacturer first determines its warranty strategy before setting the price of new products under three different warranty strategies: no warranty, transferable warranty, and non-transferable warranty. This paper reveals how warranty transferability affects the interaction between cannibalization and value-added effects in the secondary market, providing a novel approach for making warranty and pricing decisions. The findings suggest that a low-durability manufacturer may prefer a transferable warranty to accelerate turnover when it has a repair cost advantage, but may refrain from offering additional warranties when such an advantage is absent. For a high-durability manufacturer, a non-transferable warranty may raise the transaction cost in the secondary market, thereby mitigating the cannibalization effect and protecting the manufacturer’s profit. Moreover, both transferable and non-transferable warranties can enhance used product quality by influencing consumer behavior and balancing cannibalization with value-added effects. Numerical results further illustrate the impact of market factors, such as product durability, repair cost advantage, and consumer quality preferences, on the manufacturer’s optimal warranty and pricing decisions, providing strategic insights for manufacturers confronting secondary market competition.

Keywords

Asymmetric quality information / warranty transferability / strategic holding behaviors / secondary market

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