To outsource or not to outsource? Warranty service provision strategies considering competition, costs and reliability

Abstract Warranty services play an important role in protecting customers against product failure and signaling manufacturers’ product quality. In this paper, we study two warranty service provision strategies, i.e., outsourcing to third-party service providers or not outsourcing, for two competing manufacturers by considering the competition intensity, service costs and product reliability. The results show that manufacturers will be more willing to outsource when a service provider’s cost advantage is high or the competition is more intense. The results also show that both manufacturers’ profits are nonmonotonic in competition intensity, service costs and product reliability in equilibrium. This leads to counterintuitive results that more intense competition, higher service costs or lower product reliability may increase both manufacturers’ profitability depending on their warranty service outsourcing decisions. Next, by investigating the customer surplus and social welfare, we show that there exists a “triple-win” region in which warranty service outsourcing benefits manufacturers’ profits, customer surplus and social welfare at the same time only if service providers’ cost advantage and the competition intensity are both high. Finally, to test the robustness of the main results and gain additional managerial insights, several important extensions that consider product complementarity, cost asymmetry, failure probability ambiguity, customer risk aversion and warranty lengths are discussed.