Product and After-Sales Maintenance Service Pricing Decisions in a Risk-Averse Supply Chain

Abstract

After-sales service on a product could be a lucrative source of profits however it is notoriously difficult to manage due to uncertain demand from consumers, and its complex organization such as either to provide warranty or maintenance contract or repair service. This paper focuses on a problem where the manufacturer sells a repairable product while an agent provides after-sales service under uncertain demand. Due to demand volatility, either manufacturer or agent or both the players are risk-averse toward their decisions. The goal of this paper is to design various after-sales service strategies where the optimal price of repair or maintenance contract for the agent whereas the optimal product price for the manufacturer are explicitly determined such that the utility of both players can be maximized. Moreover, the impacts of risk-preference and demand uncertainty are investigated on both players’ price decisions, demand level, and their utility function. Also, the impacts of the agent’s warranty service on product price as well as repair and maintenance contract price are investigated. The interaction between the manufacturer and agent is performed under non-cooperative game where the manufacturer is the leader, and the agent is the follower. The analytical results show that when both players are risk-averse, they should adjust their prices with demand uncertainty and risk-tolerance level in order to maintain the demand stability and get more utility. Further, we consider some special cases where the risk-tolerance level of the manufacturer has an impact on the risk-neutral agent’s decisions whereas the risk-tolerance level of an agent does not have any impact on the risk-neutral manufacturer’s decisions. The analysis also shows that there is a significant impact of the agent’s free-replacement renewing warranty (FRRW) on repair and maintenance price decision if both players are risk-averse. A numerical example is presented to further illustrate the results and related issues.