DETERMINING THE OPTIMAL WARRANTY PRICE BASED ON THE PRODUCERS AND CUSTOMERS RISK PREFERENCES

We propose a warranty model for the free-replacement, fixed-period war ranty policy that determines the optimal warranty price for a given wa rranty period. We assume a constant failure rate for the product, cons tant repair costs throughout the warranty period, and a producer's and customers' risk aversion for future repair costs. Using the exponenti al utility function and the gamma failure rate distribution, we derive the decision model that maximizes the producer's certainty profit equ ivalent. Furthermore, the sensitivity of the optimal warranty price is analyzed with a numerical example with respect to such factors as (1) the producer's and customers' risk preferences, (2) their perceptions about the product failure rate, (3) the customers' loyalty to the ori ginal producer in repairing failed products, and (4) the customers' re pair price.