Warranty service outsourcing contracts decision considering warranty fraud and inspection

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.