Market Regulation of Voluntary Add-on Contracts

Konferenzbeitrag

This paper analyzes contract choices and the effectiveness of consumer protection policies when firms can offer voluntary add-on insurance for their products at the point of sale. We develop a model in which a base product can be sold together with a voluntary extended warranty contract that insures consumers against the risk of product breakdown. Some consumers do not pay attention to extended warranties before making a base product choice, but they overestimate the value of such warranties at the point of sale. Under retail competition, if the resulting extended warranty profits are sufficiently high, a no-arbitrage condition prevents the full profits from being redistributed to consumers via a lower base product price. Inducing competition in the extended warranty market weakly increases consumer welfare and weakly outperforms a minimum warranty standard, which can even reduce consumer surplus. The results of the paper are consistent with the effects of recent changes regarding extended warranty regulation by UK legislators.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Beiträge zur Jahrestagung des Vereins für Socialpolitik 2016: Demographischer Wandel - Session: Behavioral Economics ; No. E04-V2

Classification and Topics

• Classification: Wirtschaft ; Consumer Protection ; Firm Behavior: Theory ; Oligopoly and Other Imperfect Markets

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Michel, Christian
• Event: Veröffentlichung
• (who): ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft
• (where): Kiel und Hamburg
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/145892
• Last update: 10.03.2025, 11:43 AM CET