Free extended warranty service strategies with unequal consumers’ preference on retailing channels

The intense competition in product homogeneity has induced a growing number of firms to offer free extended warranty service without additional charge for consumers. This practice can significantly enhance consumer loyalty towards products, which in turn has important implications for firm performance and distribution strategies. We develop a stylized model to investigate whether the manufacturer or the retailer should provide free extended warranty services, considering unequal consumer channel preference where consumers prefer the traditional retail channel over the online channel. Our findings indicate that when the manufacturer offers a free extended warranty service, it may achieve higher profitability by introducing an online channel compared to not offering such a service, even if the online channel preference coefficient is relatively low. Interestingly, when the preference coefficient for the online channel is high, the retailer can strategically deter the manufacturer from opening an online channel by offering a free extended warranty service, provided that the marginal cost of providing this service is negligible. When the manufacturer introduces an online channel, the manufacturer benefits the most from providing a free extended warranty service, while the retailer benefits the most from offering its own free extended warranty service. However, for the entire supply chain, the strategy of the manufacturer providing a free extended warranty service dominates, irrespective of whether the manufacturer introduces an online channel or not.