Warranties
Customers tend to agonise over the relative merits of different models of electronic goods such as digital cameras or plasma televisions. But when they get to the till, many spend freely on something they barely think about at all: an extended warranty, which is often more profitable to the retailer than the device it covers.
Shoppers typically pay 10–50% of the cost of a product to insure it 1._____ the term covered by the manufacturer’s guarantee. The terms of these deals vary (and there is often a great deal of fine print), but they usually promise to repair or replace a faulty product for between one and four years. Yet products 2._____ break within the period covered, and repairs tend to cost no more than the warranty itself. That makes warranties amazingly profitable: they generate some €15 billion annually for American retailers, according to Warranty Week, a trade journal.
So why, asks a paper published in the Journal of Consumer Research, do so many customers still buy extended warranties? The authors examined purchase 3._____ from a big electronics retailer for over 600 households. They concluded that the decision to buy a warranty had a great deal to do with a shopper’s mood.
If customers are about to buy something fun (e.g., a plasma television rather than a vacuum cleaner), they will be more inclined to 4._____ on extra insurance. This is because customers value "hedonistic" items over utilitarian ones, regardless of the actual price tag.
The popularity of warranties should logically depend on the likelihood of a product’s failure, says one of the researchers. But 5._____ most policies go unused, he admits that the emotional tranquillity that comes with buying a new warranty is not in itself without value, even if "rationally, it doesn’t make sense".
The Economist