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Managing Quality under Heterogeneous Consumer Demand and Product Quality

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Abstract

Based on accepted advances in the marketing, economics, consumer behavior, and satisfaction literatures, we develop a micro-foundations model of a firm that needs to manage the quality of a product that is inherently heterogeneous in the presence of varying customer tastes or expectations for quality. Our model blends elements of the returns to quality, customer lifetime value, and service profit chain approaches to marketing. The model is then used to explain several empirical results pertaining to the marketing literature by explicitly articulating the trade-offs between customer satisfaction and costs (including opportunity costs) of quality. In this environment firms will find it optimal to allow some customers to go unsatisfied. We show that the relationship between the expected number of repeated purchases by an individual customer is endogenous to the choice of quality by the firm, indicating that the number of purchases cannot be chosen freely to estimate a customer's lifetime value.

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File URL: http://www.card.iastate.edu/publications/DBS/PDFFiles/05wp410.pdf
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Bibliographic Info

Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 05-wp410.

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Date of creation: Oct 2005
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Handle: RePEc:ias:cpaper:05-wp410

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Keywords: consumer satisfaction; heterogeneous customers; quality expectations; quality heterogeneity; quality management; repeated purchases.;

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