Brand Reputation, Warranty, and Product Quality

When product quality is unobservable to consumers, a manufacturer can convey the quality information using signals such as warranty and brand reputation. The purpose of this paper is to study the interactions between warranty, brand reputation, and product quality, and to examine the quality signaling strategies. We model a monopolist who tries to convey unobservable product quality to heterogeneous consumers, using warranty and brand reputation, in both one period and two periods. The consumers form quality beliefs based on the signals, and make purchasing decisions. Consumers also update brand reputation perceptions after product consumptions. Under this framework, we study the manufacturer’s optimal decisions of price, warranty, and quality in various decision-making situations. In addition, we study how consumers’ brand reputation updating behavior influences the optimal decisions in the two-period models.