Customers' Complaints and Quality Regulation
AbstractBy studying a monopoly investment decision, this paper considers the informativeness of customers complaints in contexts characterised by the absence of direct benefits and free riding incentives. Neither the consumer nor the regulator observe the firm's investment, they only observe a realisation of quality that is related to investment in a first order stochastically dominance sense. After observing quality, consumers decide whether to complain based on the difference between the realised quality and a reference point defined by their rational expectations. If a high proportion of consumers complain, the regulator punishes the firm. The paper shows that the absence of a reference point results either in no complaints in equilibrium or in the proportion of complaints being independent of the realised level of quality. The main result is that complaints are not always informative about the level of quality being delivered by the firm. Indeed, a firm might be punished despite of investment levels being high if consumers expected high quality or, on the contrary, not being punished when investing is low if consumers expected low quality. Furthermore, this lack of informativeness can be worsened by a repeated interaction between the firm and the consumers. JEL classification: L12 ; L15 ; D42
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Bibliographic InfoPaper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 990.
Date of creation: 2012
Date of revision:
Complaints ; Quality Regulation ; Reference Dependence;
Find related papers by JEL classification:
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-15 (All new papers)
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