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arXiv · 2501.18203

Joint Bundle Design and Pricing for Extended Warranty Providers Servicing Multi-Tier Products

Yajing Chen·Yanrong Li·Xiao-Lin Wang·Zhi-Sheng Ye
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Abstract

Extended warranties (EWs) constitute a significant source of revenue for capital-intensive products. Such products comprise multiple subsystems, enabling flexible EW design. For example, providers can bundle tailored sets of subsystems within different EW contracts, facilitating the creation of a service menu with differentiated warranty options. From the perspective of a third-party EW provider servicing multi-tier products, we develop a novel model to jointly optimize bundle design and pricing for EW options in order to maximize the expected total profit. Specifically, the problem involves determining which contracts-each containing a differentiated bundle of subsystems-to recommend for the multi-tier products and identifying the appropriate price for each contract. As the complexity of the joint optimization problem increases exponentially with the number of subsystems, we devise two solution approaches. The first approach leverages a mixed-integer second-order cone programming reformulation, which guarantees optimality but is applicable only for a small number of subsystems. The second approach utilizes an iterative two-step process, offering enhanced computational efficiency for scenarios involving a large number of subsystems. Numerical experiments validate the effectiveness of our model, particularly in scenarios characterized by high failure probabilities and a large number of subsystems.

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Yajing Chen, Yanrong Li, Xiao-Lin Wang, Zhi-Sheng Ye. 2025-01-30. Joint Bundle Design and Pricing for Extended Warranty Providers Servicing Multi-Tier Products. https://arxiv.org/abs/2501.18203

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