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The Impact of Quality Perception and Consumer Valuation Change on Manufacturer's Optimal Warranty, Pricing, and Market Coverage Strategies

Li, Kunpeng
Wang, Lan
Chhajed, Dilip
Mallik, Suman
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Abstract
We consider a manufacturer who produces and sells a new product in a monopoly market. The new product quality is unobservable to consumers before purchase. Consumers make purchase decisions based on their perception of product quality. In addition, consumer valuation toward the product will be reduced if a product failure is experienced. We formulate a two-period model to analyze the impact of consumer quality perception and consumer valuation change on manufacturer's optimal decisions over quality, warranty, price, and market coverage strategies. We find that it is optimal for the manufacturer to offer warranty compensation that is higher than the purchase price when he has a low quality reputation but is offering a high-quality product. We also identify the optimal strategy for the manufacturer in terms of market coverage. Specifically, when the consumer valuation discount factor due to product failure experience is high, it is optimal for the manufacturer to serve only the high segment in the second period. Otherwise, serving both the high and the low segments generates more profit. We further investigate consumer welfare and identify win-win conditions, where the optimal strategy of the manufacturer benefits the consumers as well.
Description
This is the peer reviewed version of the following article: Li, K., Wang, L., Chhajed, D. and Mallik, S. (2019), The Impact of Quality Perception and Consumer Valuation Change on Manufacturer's Optimal Warranty, Pricing, and Market Coverage Strategies. Decision Sciences, 50: 311-339. https://doi.org/10.1111/deci.12331, which has been published in final form at https://doi.org/10.1111/deci.12331. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. This article may not be enhanced, enriched or otherwise transformed into a derivative work, without express permission from Wiley or by statutory rights under applicable legislation. Copyright notices must not be removed, obscured or modified. The article must be linked to Wiley’s version of record on Wiley Online Library and any embedding, framing or otherwise making available the article or pages thereof by third parties from platforms, services and websites other than Wiley Online Library must be prohibited.
Date
2018-08-13
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Wiley
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Keywords
Game Theory, Market Segmentation, Multiperiod Modeling, Pricing, Product Design, Quality, Retail Marketing, Self-Selection
Citation
Li, K., Wang, L., Chhajed, D. and Mallik, S. (2019), The Impact of Quality Perception and Consumer Valuation Change on Manufacturer's Optimal Warranty, Pricing, and Market Coverage Strategies. Decision Sciences, 50: 311-339. https://doi.org/10.1111/deci.12331
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