Segmentation in Consumer Durables Markets

Abstract

Consumer durables markets are often observed to be segmented, with some firms producing highly reliable output and offering good warranty deals, while others produce less reliable output and offer less attractive warranties, but charge a lower price. The model of this paper defines reliability as the objective probability of product failure, not as a characteristic of individual goods. Reliability, thus defined, is treated as a choice variable of the firm. This approach to reliability is incorporated into a duopoly model which explains the phenomenon of segmentation described above.