Management science faculty explore warranty offerings as they relate to product reliability and producers’ involvement in secondary markets

Management science associate professor Necati Tereyagoglu and his co-authors recently published research about warranty offerings in the U.S. automotive industry and how they relate to product reliability and producers’ buyback activities in used automobile markets. After observing that producers with high and low reliability scores tend to offer longer warranties than those with intermediate reliability scores, particularly in the automotive industry, the research team theoretically shows that a producer’s buyback of used products is a possible driver for such observations in practice. Their exploratory analysis of the U.S. automotive industry data also points to this theoretically predicted dependency between producers’ buyback tendencies and warranty offerings.

Published research:

“Warranty Length, Product Reliability, and Secondary Markets” — Manufacturing and Service Operations Management, January 2022.

Why it matters:

• According to the 2008 report of J.D. Power and Associates, a U.S. leader for car reviews, ratings and awards, Suzuki offered a powertrain warranty of 7 years/100,000 miles, whereas its competitor Nissan, who had higher reliability scores, offered a powertrain warranty of 5 years/60,000 miles. In contrast, although Toyota offered a powertrain warranty of 5 years/60,000 miles, its sibling Lexus, who has higher reliability scores, offered a powertrain warranty of 6 years/70,000 miles. These observations suggest an intricate U-shaped relationship between product reliability and warranty length offerings. Considering the durable nature of the automobiles, the paper suggests that the presence of used automobile markets could play a role in determining this relationship.
• Since longer warranties will have marginal value for products with high reliability, they neither create a threat to new product sales nor lead to excessive warranty fulfillment costs. The opposite appears to be true for producers of low reliability products. To overcome the threat to new product sales and higher warranty fulfillment costs, low reliability producers can offer longer warranties by following up with the buyback of used products that can be prone to failures due to reliability issues. As for the producers of products with intermediate reliability, buyback of their used products cannot be leveraged effectively, and they benefit more from shorter warranty offerings.
• These results show that producers’ buyback of its previously sold cars and long warranties can be used jointly to effectively position their low reliability products in durable goods markets.

Research design:

• Using an analytical model, Tereyagoglu and his co-authors first study the interaction between product reliability and the producers’ warranty length choice while examining the producers’ interference in the secondary market to buy back its previously sold cars.
• The research team then tests the predictions from the results of their analytical model by using data on the U.S. automotive industry for the period of 2008-2013. In this endeavor, they utilize reliability data from the Vehicle Dependability Study administered by J.D. Power, data on warranty coverage details of manufacturers listed in the Official Warranty Guide prepared by jlwarranty and individual-level used car transactions data from the Consumer Expenditure Survey administered by the U.S. Bureau of Labor Statistics.

Learn more about Necati Tereyagoglu's research.

About Necati Tereyagoglu:

• Tereyagoglu joined the Moore School in 2019 and is now an associate professor of management science as well as academic director of the Center for Applied Business Analytics.
• His research focuses on pricing and revenue management and marketplace analytics, with special emphases on consumer behavior, economic networks and resale markets. He has had the opportunity to work on pricing and revenue management problems in automotive, entertainment, luxury and packaged-food industries.
• Tereyagoglu teaches graduate and undergraduate courses in revenue management, supply chain management and business analytics.
• He earned his Bachelor's degree in Industrial Engineering from Bilkent University in Turkey and his Master's in Statistics and a Ph.D. in Operations and Information Management from the Wharton School of the University of Pennsylvania.

Tereyagoglu researched this topic with Wayne Fu, Assistant Professor of Decision Sciences at the University of Michigan-Dearborn, and Atalay Atasu, Professor of technology and Operations management and the Bianca and James Pitt Chair in Environmental Sustainability at INSEAD.

Ongoing research:

In related research to the warranty and reliability piece, Tereyagoglu is working with co-authors on a paper, “Lemons, Trade-ins and Certified Pre-Owned Programs,” researching the economic rationale for Certified Pre-Owned programs in the U.S. automotive industry and how such programs help in influencing the used-vehicle markets to create value for both the car manufacturers and consumers.

In a world where the resale economy is growing faster than the primary counterpart, Tereyagoglu continues to highlight that integrating this growing shift with operational decisions will be a major determinant of success for many organizations.