Question

How can warranty at the seller expense signal that a product is of high quality

Answer 1

When products are new, consumers have less product quality information, as they have much more limited access to past experience, word of mouth, and reviews by third parties for the new products. The combination of expensive warranties and sizable asymmetric information suggests that warranties in the automotive industry can serve as important signals of product quality. However, warranties are only effective as signals if the manufacturers actually offer different lengths of warranty based on the quality of their product, as in a separate balance. If all companies give the same guarantee regardless of the nature of their goods as in a pooling equilibrium, customers can not use guarantees to infer relative product quality

A warranty is a manufacturer 's promise that a certain product is free from defects and that it will perform optimally as needed. A guarantee, while close to a warranty, is the manufacturer 's promise that a specific product is of good quality and will stand the test of time. Both warranties and assurances are used to make sure consumers purchase quality goods that are free from defects.

Manufacturers typically use warranties and assurances as marketing strategies to convince clients that what they purchase is of good quality. It can also be used to improve the prestige of a company, or act as a strategic market differentiator. Once you have created the right warranty and/or guarantee for your products, the next step is to integrate it into product packaging and test customers on the value proposition.