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Managing Quality under Heterogeneous Consumer Demand and Product Quality


  • Miguel Carriquiry
  • Bruce A. Babcock


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.

Suggested Citation

  • Miguel Carriquiry & Bruce A. Babcock, 2005. "Managing Quality under Heterogeneous Consumer Demand and Product Quality," Center for Agricultural and Rural Development (CARD) Publications 05-wp410, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  • Handle: RePEc:ias:cpaper:05-wp410

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    References listed on IDEAS

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

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