A comparison of adaptive and stationary repair-cost limit criteria for a producer's warranty

A producer sells a product together with a warranty valid for a specified duration. Whenever the product fails during the warranty period, the producer is responsible for making the product functional, either by replacing or repairing the equipment, according to whether the anticipated repair cost exceeds or does not exceed a specified repair-cost limit. It is assumed that repairs are minimal repairs, and that the distribution of repair costs is known, as is the time-to-failure distribution of the product. In this paper, we compare two models in discrete time. The first one involves an adaptive repair-cost limit which is set dynamically according to the age of the product, and the length of warranty remaining. The second model assumes a constant or stationary repair-cost limit throughout the warranty period. Empirical results are summarized.