Microeconomic Essay Example | Topics and Well Written Essays - 1500 words

Microeconomic - Essay Example This academic paper will be focused on the logic behind warranties as signal of quality as well as what limits the attractiveness of warranties as signals for high-quality firms. Grossman (1981) argued that indicating enhanced efficient functioning of a perfectly competitive market in a situation where there is information deficiency. Warranties offered by most production companies are considered common types of signal sent by high-quality production companies. This is at reducing consumer’s quality doubt and information gaps in the product’s quality. Quality has been used to refer to observable and unobserved product characteristics in terms of product performance and durability. The common assumption is that firms producing low-quality products find it very expensive to offer a warranty. This product assumption makes offering of product warranty a credible signal of unobservable product performance and durability among many other features. In the production industry, product failures are highly linked with product quality and workmanship hence the cost of offering the warrant will be higher for poor quality products. As a result of innovation and technological advancements, the information asymmetry between consumer and manufacturer is great. This comes about due to an increase product modifications and releases on an annual basis. In the situation of new products, consumers have very little information on product information and quality due to the unavailability of past experiences and third party reviews. The injection of costly warranties in asymmetric information implies that warranties serve as pertinent projections of product quality in the production sector. The primary objective of all businesses remains profit-making through cost minimization and revenue maximization. In case the producers manufactured goods with high chances of product failures, they will be forced to incur high costs through repair and repl acement which will