Design of a Performance-based Warranty Considering Time-varying Covariate

Performance-based warranties are being adopted by more and more manufacturers in competitive markets. Meanwhile, in order to stimulate market demand, the government has been vigorously promoting the trade-in policy in recent years. By incorporating the trade-in policy into the warranty policy, manufacturers can not only recycle products that have not yet failed and have a higher salvage value, but also promote the new-generation products to enter the market faster. Based on this motivation, this paper proposes a performance-based warranty policy combined with trade-in service. We propose a nonlinear Wiener process model with a random time-varying covariate to characterize the dynamic operating environments. Through providing the trade-in option at certain time, the optimal pricing and warranty decisions can then be obtained by maximizing the manufacturer’ total profit. Finally, we conduct Monte Carlo simulation to demonstrate the superiority of the proposed policy.