Abstract: Although consumers pay much attention on product quality (reliability), they may be uncertain about the quality information when the purchase decision is made. The manufacturer who provides high-quality products may have a different production and warranty cost structure from that with low-quality products. Hence, the high-quality manufacturer can signal its quality information by the retail price and the warranty period. Wise consumers can deduce quality information according to price and warranty period jointly. However, the extant researches examine the signaling effect of warranty and price individually.
In this study, a novel signal model consisting of both warranty and price is proposed. A market consisting of an incumbent manufacturer and an entrant one is considered. The consumers are aware of the product quality of the incumbent manufacturer, but are uncertain whether the product quality of the entrant is high or low. The existence of separating equilibriums, and the pricing and warranty decisions of the two manufacturers when the quality information is signaled solely by warranty or jointly by both price and warranty are investigated. It is shown that there exists a separating equilibrium as long as the high-quality entrant holds a smaller marginal warranty cost than the low-quality one when quality is signaled solely by warranty. When quality is signaled jointly by warranty and price, there exists a separating equilibrium under some mild conditions. In addition, the equilibrium warranty is shorter and the price is lower when quality is jointly signaled by price and warranty than solely by warranty. Finally, the numerical analysis shows that there is more likely to be a separating equilibrium when quality is jointly signaled by warranty and price.

Key words: asymmetric information, warranty, quality signaling, joint signal, separating equilibrium