Over at Marginal Revolution today, Tyler Cowen demonstrates that hope springs eternal in the economist's breast, by taking another shot at convincing the common people that extended warranties are highway robbery. He highlights this Washington Post article:
Warranty Week, an industry publication, last year estimated that of the $15 billion in premiums charged consumers in 2004, $7.5 billion went straight into the pockets of the stores that sell warranties as their cut.
Of the remaining $7.5 billion, the publication estimated that $3 billion was paid in claims by the insurance companies that back the plans. On the other hand, according to the Insurance Information Institute in 2004, the U.S. auto insurance industry paid out $66 in claims for every $100 in premiums.
Neither Circuit City nor Best Buy discloses how much of its bottom line comes from extended warranty sales. But analysts have estimated that at least 50 percent and in some lean years 100 percent of profits at the electronics retailers come from extended warranty sales.
And if that doesn't convince you, maybe this will: Paul KrugmanKurgman thinks extended warranties are the Best Thing Ever:
Insurance protects against all sorts of things, from the catastrophic loss of real estate (assuming you've been paying your taxes) to catastrophic repairs of toasters, paid for by insurance known as "extended warranties". At one time, people had to pay for appliance repairs, or worse, buy replacement space heaters, alarm clocks, and can openers. But now, we can rest assured that our "extended warranty" insurance will pay for repairs, for free, provided you have your receipt and a only a few weeks to wait for service. Yes, a courageous government would require everyone to buy extended warranties for all our purchases. … In general, mandatory universal insurance for every product and service is one of the most efficient ways of making everything free for everyone. Only the most cold-blooded government would deny it to their people.
Cowen recommends this paper on "myopia, consumer ignorance, and shrouding" for further reading on the theoretical grounding of why people are dumb enough to buy warranties over and over, even for stuff that doesn't break.
UPDATE: The quote is, of course, from Paul Krugman's Red alter ego, Paul Kurgman. My point stands.