We propose a warranty model for the free-replacement, fixed-period warranty policy that determines the optimal warranty price for a given warranty period. We assume a constant failure rate for the product, constant repair costs throughout the warranty period, and a producer`s and customers` risk aversion for future repair costs. Using the exponential utility function and the gamma failure rate distribution, we derive the decision model that maximizes the producer`s certainty profit equivalent. 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 original producer in repairing failed products, and (4) the customers` repair price.
Relation:
European Journal of Operational Research, 85(1), 97-110