Extended Warranties: Consumer and Manufacturer Perceptions

Researchers for years have been interested in the differing perceptions consumers and manufacturers hold toward express warranties (Kelley 1986). Consumers view express warranty coverage as a legal means of seeking redress if a product performs poorly and/or fails completely (Feldman 1976). Conversely, many manufacturers view express warranties as promotional tools and as an alternative to price competition (Koten 1984). Strategically, some manufacturers view express warranties as promotional tools and as an alternative to price competition (Koten 1984). Strategically, some manufacturers have begun to rely on express warranty coverage as the basis for developing a competitive advantage. For example, U.S. automakers in recent years upgraded coverage they provide on the power trains of domestically produced cars in an effort to differentiate themselves and boost market share (Levin and Guiles 1987; Singer 1987). While positive overall, improvements made to express warranties cast into doubt the benefits and value consumers receive from another increasingly popular form of warranty coverage, extended warranties. Extended warranties are purchased by consumers and cover parts, as well as possibly labor, for a period beyond the duration of the express warranty. Their popularity is well documented. Plotkin (1985), for example, reported that between 33 and 50 percent of all new car buyers purchase extended warranties. Moreover, while there are perhaps only 20 major automobile manufacturers that market their products in the United States, over 250 firms are involved in selling extended warranties on new cars (Day and Fox 1985). The purpose of this article is to contribute to the emerging knowledge base on extended warranties. Specifically, and following a review of the relevant warranty literature, several exploratory research propositions are field tested. Managerial and public policy implications are then explored. Finally, limitations of the present study and directions for research are highlighted. LITERATURE REVIEW Express warranties have been extensively studied by scholars since the passage of the Magnuson-Moss Act (Kelley 1986). This literature, together with the extended warranty research conducted to date, provides insights to scholars interested in further studying extended warranties. One stream of research has found that consumers: (1) view Magnuson-Moss Act warranties as the same or worse than pre-Act warranties (McDaniel and Rao 1982); and (2) may be willing to pay for better warranty protection (Rao and Weinrauch 1976). These results suggest consumers may turn to extended warranties as a way of compensating for insufficient express warranty protection. Unfortunately, some extended warranties include exclusions, are subject to the interpretation of the warrantor, fail to cover repairs due to normal wear and tear, and duplicate coverage provided in the express warranty (Rigg 1986; Silber 1983). A second stream of research has focused on the use of express warranties as signals of product reliability information (Gerner and Bryant 1981; Kelley 1988; Wiener 1985). While manufacturers certainly communicate with consumers through extended warranties, their role in signaling has not yet been investigated. A third research stream has focused on the ability of express warranties to reduce consumers' perceived risk (Armstrong, Kendall, and Russ 1975; Bearden and Shimp 1982; Shimp and Bearden 1982). Given the findings in this area, purchase of an extended warranty may in part be motivated by the desire to reduce risk. In this respect, evidence exists that suggests lower income, lower education, and larger family demographic clusters may purchase more extended warranties in an effort to reduce financial and performance risk (Center for Policy Alternatives 1978). Finally, economic considerations appear to play a role when consumers evaluate extended warranties. …