Optimal Warranty Policy for Consumer Electronics with Dependent Competing Failure Processes

•To determine the optimal warranty policy facing consumers with different risk attitudes.•Both a long-range warranty at a lump-sum price and a monthly warranty are considered.•When repair costs are relatively high, firmsshould offer the monthly warranty.•The product quality and deterioration rate are critical in determining a warranty policy.•Firms have to manage the repair costs of minor failures efficiently for warranty claims. This study considers warranties for consumer electronics with multiple dependent competing failure processes, including minor, over-degradation and catastrophic failure. Furthermore, the two alternative warranty programs are investigated: (1) a long-range warranty at a fixed lump-sum price and (2) a monthly warranty plan that can be either extended for the next month by continuous purchasing or terminated at the end of the current month. A designed dynamic programming approach is employed to obtain optimal solutions for warranty programs. Moreover, consumers with different attitudes toward risk are taken in consideration, and sensitivity analyses are performed to investigate the effects that the related factors have on profit. Integrating all issues, the study proposes extended warranty programs of lump-sum or monthly payment to different risk attitudes consumers with different attitudes toward risk with consideration of multiple dependent competing failure processes. The results indicate that high repair and replacement costs favor the monthly warranty program for firms. In addition, when there are more risk averse consumers in a market, there will be fewer purchases of a monthly warranty program, and it would thus be more profitable for firms to offer the one year warranty program.