The Effect of Product Misperception on Economic Outcomes: Evidence from the Extended Warranty Market

Jose Miguel Abito, Yuval Salant

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

Panel and experimental data are used to analyse the economic outcomes in the extended warranty market. We establish that the strong demand and high profits in this market are driven by consumers distorting the failure probability of the insured product, rather than standard risk aversion or sellers' market power. Providing information to consumers about failure probabilities significantly reduces their willingness to pay for warranties, indicating the important role of information, or lack of, in driving consumers' purchase behaviour. Such information provision is shown to be more effective in enhancing consumer welfare than additional market competition.

Original languageEnglish (US)
Pages (from-to)2285-2318
Number of pages34
JournalReview of Economic Studies
Volume86
Issue number6
DOIs
StatePublished - Nov 1 2019

Keywords

  • Consumer protection
  • D03
  • D18
  • D60
  • D81
  • Extended warranty
  • G02
  • G22
  • Probability overestimation
  • Risk preferences

ASJC Scopus subject areas

  • Economics and Econometrics

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