Integrated Pricing and Inventory Decisions for Product Quality-Driven Extended Warranty Services

Abstract

Extended warranty services have become increasingly important for both manufacturers and retailers, offering avenues for new profit sources and growth opportunities. Focusing on the multiple effects of product quality, this study develops a two-period supply chain decision model to analyze the effects of product quality, pricing, and inventory management in the context of extended warranty services. Using a Stackelberg dynamic game model, this study examines the interaction between a manufacturer and a dominant retailer who provides extended warranties. The results indicate significant differences in optimal decisions between centralized and decentralized supply chains, especially concerning pricing and inventory control. Introducing a “quality cost-sharing” contract enhances product quality and improves coordination, leading to increased profits for both the manufacturer and the retailer. Numerical simulations confirm that the cost-sharing contract effectively balances product quality improvements with supply chain profitability.