Designing and pricing of two-dimensional extended warranty contracts based on usage rate

For vehicles sold under a two-dimensional warranty, which consists of two-dimensional region of age and usage, automobile manufacturers or third-party after-sales departments offer free warranty service under the base warranty. Consumers require a longer and better developed warranty service because of the rapidly developing production technology and other reasons. In the topic of two-dimensional warranty, previous research has extended the coverage of the base warranty, which satisfies consumers’ requirements but places significant pressure on automobile manufacturers. This study proposes a designing and pricing model of two-dimensional extended warranty contracts. The mathematical model is divided into two categories: the purchase of two-dimensional extended warranty service at the point of sale and the expiration of the base warranty. Based on the maintenance strategy used during the extended warranty, we classify this study under the minimal repair and combined maintenance strategy models. With the use of the failure and usage rate distribution functions, the mathematical pricing models of each sub-case are presented. A numerical example of a vehicle made in China is given to illustrate the procedure of the models. The results of this study provide automobile manufacturers with guidelines on designing and pricing two-dimensional extended warranty contracts.