Modelling monopolist pricing and protection period decisions for new products under warranty

The main objectives of this paper are to propose diffusion models that incorporate price and warranty period, to derive optimal pricing and warranty period policies over the planning horizon and to choose among alternative model specifications. The study assumes low distount rates and significant effect of experience on production costs. Four high-priced consumer durables are analysed for which penetration, price and warranty data are available. Empirical research findings suggest that for the products under study, price and warranty period play a significant role in the diffusion process. Theoretical research findings imply that previous monopolist pricing results are in general robust upon the inclusion of the additional marketing variable in the diffusion model. The warranty period is found to be dependent on the pricing policy and influenced considerably by the shape of the pricing response function.