On the Relationship between Warranty and the Risk of Information Asymmetry

Abstract

Nowadays the product warranty is considered to be a valuable attribute of the product. It is a tool to enforce the competing power of the producer on the market place. There are two types of problems the product warranty addresses. Firstly, warranty deals with the malfunctioning of the product and, secondly, it addresses the information asymmetry, i.e., the misunderstanding and misinterpretation of the features and qualities of the product. The second aspect is of great importance in the light of indirect business communication, as in e-commerce. The aim of this paper is quantifying the risk of misunderstanding caused by information asymmetry and defining an appropriate product warranty policy, which depends on this risk.

The Role of Warranty of Misinforming for New Product Adoption

“…If the impact of information asymmetry is disregarded, the risk of being misinformed is underestimated and often ignored in purchase decision making. In data collected in an empirical study, published in Christozov, Chukova, and Mateev (2007) among 65 respondents only 6 recognized their uncertainty of whether the product is suitable for their needs. The data revealed that the overall risk of making a wrong decision was above 40%.…”

Warranty and the Risk of Misinforming: Evaluation of the Degree of Acceptance

“…Next, we extend the model for quantifying the risk of misinforming, proposed in Christozov, Chukova, and Mateev (2007) study. One of the main difficulties in quantifying the risk of misinforming is that the risk is subjective, i.e., one and the same message containing information on the product of interest, may convey correct information to some customers and misinform others.…”

“…describes the set of tasks as a union of buyers' tasks, whereas A * is the same set of tasks from task category point of view, (for details, see Christozov, Chukova, and Mateev (2007)). For completeness, we assume that all buyers need to solve for all tasks, but for some of these tasks the buyer's need to solve is equal to zero.…”

“…In this communication, the information asymmetry is due to the difference between the expertise of the seller and the buyer regarding the product D. The usage of a specialized terminology in the message may increase the level of information asymmetry. Based on this message and his/her background, the buyer j assesses the probability From here onwards, we will follow the notations and assumptions used in Christozov, Chukova, and Mateev (2007). For details on the evaluation of the risk of misinforming and the relationship between this risk and product warranty we refer the reader to Christozov, Chukova and Mateev (2007).…”

“…Based on this message and his/her background, the buyer j assesses the probability From here onwards, we will follow the notations and assumptions used in Christozov, Chukova, and Mateev (2007). For details on the evaluation of the risk of misinforming and the relationship between this risk and product warranty we refer the reader to Christozov, Chukova and Mateev (2007). Next, we illustrate our ideas and findings, including the evaluation of the degree of acceptance, using an example.…”