Cost analysis of pro rata and free-replacement warranties

This article examines the short run total costs and long run average costs of products under warranty. Formulae for both consumer cost under warranty and producer profit are derived. The results in the case of the pro rata warranty correct a mistake appearing in Blischke and Scheuer 5]. We also show that expected average cost to both the producer and the consumer of a product under warranty depends on both the mean of the product lifetime distribution and on its failure rate.