Nicollier, Luciana A. (2012) Customers' complaints and quality regulation. Working Paper. Coventry: Department of Economics, University of Warwick. (Warwick economics research paper series (TWERPS). (Unpublished)

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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.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Quality of products, Consumer complaints, Capital investments, Business enterprises, Economics -- Mathematical models
Series Name:	Warwick economics research paper series (TWERPS)
Publisher:	Department of Economics, University of Warwick
Place of Publication:	Coventry
Date:	1 May 2012
Number:	Number 990
Number of Pages:	36
Status:	Not Peer Reviewed
Publication Status:	Unpublished
Access rights to Published version:	Open Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/45595

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