According to research conducted by the Tepper School of Business at Carnegie Mellon University, consumers are more likely to buy the warranties for items like iPods or DVD players than for items such as computers and printers.
"Buyers often place more value on pleasure purchases, feel there is a greater risk to their well-being if they do not function, and are willing to pay extra to protect them," said Baohong Sun, Carnegie Bosch Professor of Marketing and co-author of the study, in a statement.
The study, which used field data from retail environments, also found that retailers often lure consumers to buy the warranties by offering promotions such as unadvertised in-store discounts on certain products, giving buyers the impression that they're getting a deal on the item, and enticing them to spend the savings on the extended service contracts.
Furthermore, low-income consumers are more likely to buy extended warranties than higher-income consumers. According to Sun, the lower-income consumers are more sensitive about possible replacement costs of a broken product than the higher-income consumers.
"When you consider that low-income buyers are more likely to purchase ESCs, it is evident they can have a perverse impact on consumer welfare," adds Sun. "They increase the price of goods for those who can afford it least."