Optimal design of uptime-guarantee contracts

Uptime-guarantee maintenance contracts reflect the obligation of service providers to maintain full functionality of equipment in certain fractions of working time in a period. In this paper, we study the optimal design of uptime-guarantee contracts for a service provider who does not know the customer’s exact valuation for having the equipment up and running per unit of working time. We first consider the case of service provider offering a single contract and obtain the optimal contract for situations where the customer’s valuation has Increasing Generalized Failure Rate (IGFR) distribution functions. In the second part of the paper we consider the case where service provider proposes a menu of contracts with various guaranteed uptime levels. Under certain conditions on costs of providing different contracts, we find the optimal prices for uptime-guarantee contract menus. We provide necessary and sufficient conditions for the existence of optimal contract menus.