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Do warranties signal the relative reliability of brands in the marketplace? Is the nature of the warranty-reliability relationship influenced by product-market characteristics such as product age, market penetration, or the amount of variation in the reliability of brands within product classes? Examination of these issues is important for public policy makers, managers, and consumers.
Product warranties provide consumers with written assurance of what a manufacturer will or will not cover in the event of product failure. Helping consumers make better informed choices is the objective underlying the Magnuson-Moss Warranty--Federal Trade Commission Improvement Act of 1975. This Act sets guidelines to ensure that warranty information is expressed in unambiguous and easily understandable terms. According to this Act, firms that provide "written" warranties for products costing $15 or more are required to comply with the Act's provisions concerning the manner in which warranty terms are presented to consumers. In essence, FTC rules promulgated under this law enforce the kind of warranty information that must be disclosed, the means through which warranty information is disseminated, and the manner in which disputes are settled among parties (Feldman 1976).
Warranties are now recognized as an integral component of firms' strategic marketing plans. Chrysler, for example, effectively used warranty terms of its automobiles to generate greater consumer confidence in its products. Many other firms are likewise discovering that offering longer or more comprehensive warranties enables them to compete more effectively against foreign and domestic rivals. Many appliance manufacturers prominently display the warranty terms of their brands at retail outlets. Information on warranty terms is also provided to consumers through advertising and other media. Manufacturers' promotion of warranty contracts may reflect confidence in the reliability of their brands.
Research suggests that consumers believe that warranty terms are an important source of information regarding brand reliability. For example, Boulding and Kirmani (1993) report the result of an experimental study in which consumers relied on warranty scope and manufacturer reputation to make inferences about brand reliability. Other studies show that more comprehensive warranty terms alleviate perceived financial and performance risk associated with purchase decisions (Bearden and Shimp 1982; Shimp and Bearden 1982). In a recent nationwide survey, one out of every two consumers interviewed reported using warranty information to judge product reliability (U.S. Department...