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The Protection Economy: Occasional Service Failure as a Business Model

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  • Halbheer , Daniel
  • Gerstner , Eitan
  • Koenigsberg , Oded

Abstract

Conventional wisdom holds that service failure creates customer misery and reduces firm profitability. This paper challenges this view and shows that occasional service failure can be profitable for the firm when optional protection against the resulting customer misery can be marketed. It also shows that a firm that uses such a protection strategy inflicts a calculated misery on unprotected customers and wastes resources to provide the protection. Despite these inefficiencies, using the protection strategy can lead to market expansion and social welfare gains due to lower prices.

Suggested Citation

  • Halbheer , Daniel & Gerstner , Eitan & Koenigsberg , Oded, 2015. "The Protection Economy: Occasional Service Failure as a Business Model," HEC Research Papers Series 1124, HEC Paris.
  • Handle: RePEc:ebg:heccah:1124
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    Cited by:

    1. Anthony Dukes & Yi Zhu, 2019. "Why Customer Service Frustrates Consumers: Using a Tiered Organizational Structure to Exploit Hassle Costs," Marketing Science, INFORMS, vol. 38(3), pages 500-515, May.

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    Keywords

    Service Failure; Customer Damage; Random Versioning;
    All these keywords.

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