Optimal reliability and price choices for products under warranty

The success of a new product depends on both engineering decision (product reliability) and marketing decisions (price, warranty). Better reliability results in higher manufacturing cost and higher sale price. Consumers are willing to pay a higher price only if they have assurance about product reliability. Product warranty is one such tool to signal reliability with longer warranty period indicating better reliability. Better warranty terms result in increased sales and also higher expected warranty servicing costs. Warranty costs get reduced with improvement in product reliability. The learning effects result in the unit manufacturing cost decreasing with total sales and this in turn impacts on sale price. As such, reliability, price and warranty decisions need to be done jointly. The paper develops a model for this and looks at two scenarios for the pricing of the product. A numerical example is given to illustrate the proposed model