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Customers' Complaints and Quality Regulation

Author

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  • Nicollier, Luciana A.

    (Department of Economics, University of Warwick)

Abstract

By 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

Suggested Citation

  • Nicollier, Luciana A., 2012. "Customers' Complaints and Quality Regulation," The Warwick Economics Research Paper Series (TWERPS) 990, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:990
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2012/twerp_990.pdf
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    References listed on IDEAS

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    1. Waterson, Michael & Doyle, Chris, 2010. "Your call: eBay and demand for the iPhone 4," The Warwick Economics Research Paper Series (TWERPS) 949, University of Warwick, Department of Economics.
    2. Paul Resnick & Richard Zeckhauser & John Swanson & Kate Lockwood, 2006. "The value of reputation on eBay: A controlled experiment," Experimental Economics, Springer;Economic Science Association, vol. 9(2), pages 79-101, June.
    3. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135-135.
    4. Silke J. Forbes, 2008. "THE EFFECT OF SERVICE QUALITY AND EXPECTATIONS ON CUSTOMER COMPLAINTS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 56(1), pages 190-213, March.
    5. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, January.
    6. Stephen Coate & Michael Conlin, 2004. "A Group Rule–Utilitarian Approach to Voter Turnout: Theory and Evidence," American Economic Review, American Economic Association, vol. 94(5), pages 1476-1504, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Complaints ; Quality Regulation ; Reference Dependence;

    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, Pricing, and Design - - - Monopoly

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