4. Extended Warranty

An extended warranty is the extension of the base warranty which is an obligation or responsibility assumed by the manufacturer or dealer for further service to buyers beyond the base warranty period for a certain premium. In recent years, the concept of extended warranty has received significant attention due to the claims made by some authors that many extended warranty service providers are earning huge profits by selling extended warranty. These types of warranties are becoming more and more popular to the buyers as these provide assurance for a longer reliable service life, protection of customers against poor quality and the potential high cost of failure occurring in products life cycle. At the same time a large number of buyers are still unsure about the additional costs and benefits of buying extended warranty for their products. Although the concept of extended warranty has attracted significant attention among practitioners, especially in recent years, the academic research on extended warranty is very limited. This chapter overviews the existing academic research outcomes on extended warranty basics in the beginning and then focuses on developing models for predicting the minimum duration of extended warranty a customer should purchase and the cost of providing extended warranty. Mathematical models are developed using cumulative hazard function and renewal function.