Extended warranties, adverse selection, and aftermarkets

This article investigates whether the contractual exclusion of third-party extended warranties should be legally permissible, using a model incorporat ing consumer heterogeneity. The welfare effects of competition in the marke t for extended warranties are shown to depend on the degree of competition in the product market. In contrast to the approach typically adopted by the courts, the article argues that manufacturers should not generally be perm itted to practice requirements contracting in extended warranties, even whe n the product market is competitive.