This paper studies a dual-channel supply chain composed of a manufacturer and a retailer. The manufacturer and the retailer sell homogeneous durable goods bundled with warranty service that is provided by the manufacturer, and they compete for customers by offering free value-added service. Both the warranty and value-added services can affect the purchasing behaviour of customers. We examine the warranty service decision of the manufacturer and the value-added service competition between the manufacturer and the retailer. Three types of warranty service strategies that can affect the value-added service competition are proposed. By analysing the equilibriums of the value-added service level decisions of the manufacturer and the retailer, we find that when the manufacturer increases its warranty service level, the value-added service competition will be weakened, and when the warranty service level is high enough, there is no value-added service competition. In addition, we examine the optimal warranty service strategy and warranty service level of the manufacturer under different conditions, and we find that the stronger the manufacturer’s bargaining power is, or the stronger the value-added service competition intensity is, the more motivation the manufacturer has to provide a high warranty service level. Numerical examples reveal that differentiation strategy in value-added service may hurt the profits of the manufacturer, the retailer and the entire supply chain.