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Have you driven a lemon lately?
STANFORD - Auto manufacturers could benefit by offering three-year warranties on their products, say two researchers who sampled new car buyers and their preferences when buying service contracts.
V. Padmanabhan, assistant professor of marketing at the Stanford Business School, and Ram C. Rao of the University of Texas at Dallas investigated how manufacturers' warranties affect consumers' decisions to buy extended service contracts to protect against the cost of mechanical failures. In many cases, third parties, not the auto manufacturer, realize the profit from such contracts.
The researchers showed that consumers would be less likely to feel the need to buy extended contracts from third parties when auto manufacturers offered standard three-year warranties themselves.
Even when the added expenses for repairs offered under the longer warranty were taken into consideration, said Padmanabhan and Rao, manufacturers would realize profits by offering the three-year warranty.
One potential risk to auto manufacturers is that consumers who were more likely to want an extended warranty did not spend as much time on routine maintenance, such as changing oil and checking other fluid levels.
Although they surveyed auto buyers specifically, Padmanabhan and Rao said their theory could be used to forecast what types of warranties would overcome consumers' concerns about a variety of products.
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