Many retailers offer warranties on the goods they sell, whether they be electron
ID: 1097087 • Letter: M
Question
Many retailers offer warranties on the goods they sell, whether they be electronic products, houseware produiucts or cars.
(1) what type of problems resulting from information asymmetries between buyers and sellers motivate retailers to offer warranties? are these moral hazard or adverse selection problems?
(2) If a consumer would never buy a retailer's product more than once, what would happen to the retailer's incentive to offer warranty? would your answer change if consumer could find out about the quality of retailer's product before purchase?
(3) Many retailers who include warranties with the products they sell also offer extended warranties which consumers can purchase at an extra cost. What type of information problem would an extended warranty be designed to correct?
Explanation / Answer
1. The following are the list of problems that might rise from information asymmetries between buyers and sellers:
a. Proper information on products will not be conveyed to buyers.
b. If the manufacturing company provides less incentives for each sale compared with its rivals then the retailers will not advertise the product properly there by reduing the reach of the product.
c. Buyers might not be completely satisfied by the retailers information about the product.
d. Sellers will only present the positives about the product and will hide the disadvantages. Hence by offering warranties the buyers will get a sense of trust on the company.
These are all results of moral hazards. The sellers will have to be morally trained and the buyers will have to be morally prepared to buy the produt. They should not wrongly interpret that the product might give more problems as lot of warranties are offered.
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2. If a consumer resists or stops herself or himself from buying a retailer's product more than once then the retailer's incentive to offer warranty will definitely decrease.
Yes, if the consumer finds out about the quality of the product and the is convinced that the quality of the product is really good, then the consumer might not stop from purchasing.
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3. The type of information that an extended warranty be designed to correct are as follows:
a. The sub components that are crucial to the product's functionality.
b. Many sub parts that might not be easily available in the market will be covered in extended warranty.
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