Ethics of Extended Warranties

Shopping this weekend, I was twice offered the “opportunity” to buy an extended warranty on a consumer good. Both times I declined. In one case, I bit my tongue because the warranty was such a bad deal that I was tempted to chastise the salesman. But in neither case do I think it wrong for the sellers to try to sell the warranty to me.

Let me explain.

“Extended” warranty offers are of course common these days. Such warranties may cover a longer period of time, or cover a greater range of problems than does the basic warranty that comes with the product. Whether you’re buying small electronics or a laptop or major appliances, the salesperson will likely offer you the chance to pay extra to get a warranty that goes above and beyond.

But let’s focus here on the small stuff — not major appliances, but smaller items. And let’s start with the two warranties I turned down this weekend.

First, I bought a new pair of prescription reading glasses, for $500. The extra warranty I was offered was priced at $25.

Next, I bought a small, waterproof digital camera to take on a beach vacation. Cost: $189. The young salesman (he could have been one of my students) confidently explained that I “really should” buy the extended warranty, for “just $49.”

Now, whether you should buy a warranty depends on two things. First, it depends on the probability that something bad will happen to the product you’ve bought, multiplied by the cost of repair. That gives you the “expected value” of not having the warranty, which is what you must compare to the expected value — the price— of buying the warranty. In most cases, the expected value of the warranty will be lower than the value of going with out it. Not a good deal.

But one more factor must be counted, namely whether you can afford to cover the cost of loss or damage yourself. If my house burned down, I wouldn’t be able to afford to buy another one, which is why I have house insurance. But in the case of the $189 camera, I know that if it breaks I can afford simply to pull out my credit card and buy another, and so the ridiculously expensive warranty doesn’t make sense for me. But the warranty could conceivably make sense for someone who has the extra $49 to spend on the warranty, but who absolutely would not be able to afford another $189 for a new camera eighteen months from now. People in that category are presumably relatively few, but probably not zero.

What direction did my rough math point in, for the two warranties I was offered this weekend? I figured the warranty on the glasses might, barely, be worth it, but I decided to take a risk and opted not to buy. (Besides, I’m in my 40’s and my prescription might well change in the next 2 years, which would mean buying new glasses anyway.) The warranty on the camera, on the other hand, was laughable; I would have been a fool to buy it. (You can find lots of blog entries out there about why extended warranties on small electronics are generally a bad deal.)

So what about the ethics of offering such crummy warranty deals to customers?

In generally, I think it’s ethically fine to offer such warranties, even though they’re generally a bad deal.

First, the dollar value on these things is relatively low. So, although I think the $49 warranty is (for most buyers) a rip off, it’s a small rip off. No one is going to miss a mortgage payment over it.

Second, the ability to figure out whether a warranty is worth it is well within what we should expect in terms of basic financial literacy for grown-ups. That’s not to say that everyone has that bit of financial literacy. But warranties on small electronics are very simple insurance policies. Compare the question of selling indexed annuities or derivatives or other complex investments. In those cases, investment professionals are selling highly sophisticated financial instruments, and we should expect them only to sell them to sophisticated investors.

So buyer beware. There are bad warranties out there. And they’re generally not unethical products, so even an honest salesperson earnestly advise you to buy a warranty that you don’t really need.

3 comments so far

  1. Ashlee Thomas on

    Dr. MacDonald

    I totally agree with everything you said in this blog post. You made a great point about how for you at the age of 40 since your prescription might be changing it would not be ethical to buy a warranty. I feel like the age of a person makes a huge difference if the warranty is ethical or not. Since I am only in my early 20’s if I were buying a new pair of glasses a warranty would be a smart decision for me to purchase. One reason is because since I am so young my prescription isn’t very likely to change. The second reason is I am not very careful with things like that, so I would be very likely to break them. I had never really thought about the idea about how ethical it is to offer crummy warranty deal to customers until you brought that idea up. As Johannesen, Valde, and Whedbee (2008) states “Does responsibility and accountability reside at the top with the president, corporate executive officer, or chair of the board? Or does it reside with the immediate communicator?” I believe that many people get annoyed with the immediate communicator when it is really the head of the corporations fault.

    Ashlee Thomas
    Drury University

  2. Stephanie Thomas on

    This is an interesting post that discusses a topic more common than one might think. Warranties such as those depicted in the post may seem unethical due to the fact that they are quite unnecessary. Although the premise of an unnecessary warranty may give the consumer the impression that the company is preying upon naive individuals, the intent may not be truly negative. According to The Rule of Conscience, morality is determined by the conscience of the individual (Beauchamp, 2013, p.6). When a young salesperson promotes the warranty, they may be acting in a completely moral frame of mind believing that they are helping others. Conversely, a corporation that offers the warranty may be operating with the sole purpose of generating more revenue at the expense of the customer.

    Ultimately, it is to the discretion of the individual to determine whether or not they will buy the additional coverage. Ethical or not, the consumer is presented with many options daily and must choose the option that works best with their situation. Therefore, if a company chooses to offer additional coverage options for consumers, the choices should be listed at a rate that is reasonable. If, however, the corporation becomes greedy, the free enterprise system will likely cause the product and possibly the company to go out of business if their competitor does a better job.

    References:
    Beauchamp, T. (2013). Ethical Theory and Business (9TH ed.). Upper Saddle River: Pearson.

    Stephanie Thomas

  3. lina rave on

    this is very interesting & helpful ,but I have long been of the belief that extended warranties offered on any product are an absolute waste of money. The benefit that you get out of them is usually zero, and most companies know that. For the majority of all products which generally have this extended warranty, their average lifespan far outweighs the short time of these extended warranties.


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