In this paper, I investigate the impact of the conformance quality of a durable product on manufacturer's and user's replacement costs while the product is under warranty. I first relate conformance quality to reliability and then examine its effects on warranty costs to manufacturer and customer under both pro‐rata and free‐replacement warranties. In particular, I show that the reduction in customer's cost is generally contingent on more stringent quality improvement than the reduction in manufacturer's costs. I also discuss the value of inspection, and I present an application based on real data.
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