Abstract: A demand function for extended warranty is constructed based on consumers risk aversion level. Then, by using Stackelberg game analysis, manufacturers profit models under both direct and retail channels are built. In considering double marginal and complementary effect, the impact of extended warranty service level on manufacturers profit is analyzed by combining numerical examples. Results show that the impact of service level on manufacturers profit for both channels is consistent with the diminishing marginal utility. Due to the combination of complementary effect and double marginal effect, service level has different effect on manufacturers channel selection for extended warranty at different level. The optimal choice for manufacturers is to sell extended warranty through retail channel when service level is low, and to sell it through direct channel when service level is high.

Key words: extended warranty, service level, double marginal effect, complementary effect, channel selection