Warranty service outsourcing contracts decision considering warranty fraud and inspection

Abstract In recent years, some manufacturers outsource the warranty service for flexibility and cost efficiency. Therefore, the manufacturer has to face a problem of outsourcing warranty contract design to deal with the fraud of the agents in service. Considering a price‐and‐service‐sensitive demand, we studied two warranty‐outsourcing contracts (the fixed‐price contract and the cost‐based contract) in a supply chain setting comprising one risk‐neutral manufacturer and one risk‐averse service agent. The results show that, when the market is sensitive to warranty service, the cost‐based contract benefits the manufacturer in demand promotion. Interestingly, even if the cost‐based contract increases the amount of consumers for the service agent, the fixed‐price contract always benefits the agent with low risk‐aversion level.