Product Warranties under Ambiguity
Michael A. Hamilton

Abstract
This study analyzes warranties as a marketing mechanism in a framework in which consumers face ambiguity about product quality. Producers use warranties to induce ambiguity-averse consumers to participate in their product markets. Product prices and product warranties are determined in equilibrium, incorporating market participants’ beliefs about product quality. Competition among customers induces producers to improve product quality, leading to long duration for product warranties.

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