Can consumer complaints reduce product reliability? Should we worry?

• Date: 01 January 2020
• Author: Joaquín Coleff
• Published date: 01 January 2020
• DOI: http://doi.org/10.1111/jems.12335

J Econ Manage Strat. 2020;29:74–96.wileyonlinelibrary.com/journal/jems74

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© 2019 Wiley Periodicals, Inc.

Received: 11 October 2013

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Revised: 1 October 2019

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Accepted: 6 November 2019

DOI: 10.1111/jems.12335

ORIGINAL ARTICLE

Can consumer complaints reduce product reliability?

Should we worry?

Joaquín Coleff

1,2

1

Centro de Estudios Distributivos

Laborales y Sociales (CEDLAS), Instituto

de Investigaciones Económicas, Facultad

de Ciencias Económicas, Universidad

Nacional de La Plata, La Plata, Argentina

2

Comisión de Investigaciones Científicas

(CIC), La Plata, Argentina

Correspondence

Joaquín Coleff, Centro de Estudios

Distributivos Laborales y Sociales

(CEDLAS), Instituto de Investigaciones

Económicas, Facultad de Ciencias

Económicas, Universidad Nacional de La

Plata, Calle 6 # 777, La Plata 1900,

Argentina.

Email: jcoleff@gmail.com

Abstract

We analyze a monopolist’s pricing and product reliability decision in a model

where consumers are entitled to product replacement if the product fails, but

have heterogeneous costs of exercising this right. Our main result shows that,

under some conditions, a decrease in consumers expected to claim cost leads to

a decrease in product reliability but an increase in profit and welfare. This result

is robust to a number of extensions. Our results are in line with anecdotal

evidence suggesting that changes in consumers’claiming cost can be induced by

both third parties (governments, consumers’organizations, private enterprises,

etc.) and firms. More precisely, since, under some conditions, profit and welfare

align, public initiatives oriented to lower consumers’claiming cost will be

ultimately joined by firms that benefit from further increases in complaints.

KEYWORDS

consumer complaints, liability cost, product reliability, warranty

JEL CLASSIFICATION

D21; D42; K41; L10

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INTRODUCTION

In the past five decades consumers have increasingly resorted to customers’claims in response to the purchase of faulty

units. Several factors may contribute to explain this observation. First, legislation has granted an increasing number of

rights to consumers. In 1962, Kennedy’s Administration introduced the Consumer Bill of Rights introducing, for the

first time, the rights to Safety, Choose, Be Informed, and Be Heard. Later, in 1985, additional consumer rights were

added: Satisfaction of Basic Needs, Redress, Consumer Education, and Healthy Environment. Since then, similar

legislations have been passed in most countries. Second, markets have experienced a proliferation of institutions aimed

at easing the process of complaining by consumers. Examples of these abound: small courts, class action lawsuits,

public agencies (e.g., National Highway Traffic Safety Administration [NHTSA] in the United States) and consumer

associations (e.g., Consumer Union provides information or claims on consumer’s behalf). At the same time,

developments in information and communication technologies (ICT) have made simpler for consumers to voice their

complaints. For example, car‐related complaints directed to NHTSA rose from dozens to thousands when e‐mail and

online complaints were first introduced in 1995. In the same way, customer engagement platforms like

“getsatisfaction.com”(US) or “miqueja.com”(Spain) provide online services to handle complaints, to mediate between

consumers and firms, and to rank firms according to the number of complaints received and the responses given to

them. Finally, firms have recently taken upon themselves to handle consumer complaints effectively; more than 40,000

firms use “getsatisfaction.com”in the United States.

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In view of these trends, it is natural to ask to what extent changes

in consumers’claiming cost—and thus in consumers’complaining behavior—affect product reliability, firm’s profit,

and welfare.

This paper studies the effects that an exogenous reduction in consumers’claiming cost has on product reliability,

private profit, and social welfare. In our model, a monopolist chooses the price and the reliability rate of the product it

manufactures. The product’s reliability is defined by the probability that the product is not defective. Providing a more

reliable product or replacing a faulty unit are costly actions for the firm. At the same time, increasing the product’s

reliability lowers the firm’s expected cost associated with replacements. This effect, that we termed replacement effect,

increases with the number of replacements requested.

In the benchmark model, the consumer complaining behavior is always efficient, by assuming that with some

probability a consumer is a claimant with no cost of requesting a replacement/compensation. Otherwise, the consumer

is a nonclaimant (or has an extremely high claiming cost). Consumers are heterogeneous in their valuations for the

product. Their utilities depend on whether the product turns out to be defective or not. After buying a faulty product, a

claimant files a costless complaint to pursue a replacement and a nonclaimant scraps the product.

2

We assume that

consumers only know if they are claimants or nonclaimants after purchasing a faulty product. Consumers anticipate

the expected future cost associated with defective units when calculating their willingness to pay for the product. In our

benchmark case, this cost comprises a cost associated with the disposal of defective units—in case the consumer is

nonclaimant. We call demand effect to the effect of an increase in the product’s reliability on consumers’willingness to

pay. The higher the probability that the consumer is nonclaimant, the lower his willingness to pay but the larger the

demand effect. In other words, as it becomes less likely for a consumer to request a replacement, his willingness to pay

becomes more sensitive to the product’s reliability. For this benchmark case, a reduction in consumers’claiming cost is

represented by an increase in the likelihood of being claimant and thus, an increase in the number of claimants among

buyers.

We first show that the product’s reliability decreases when the number of claimants increases. This result is driven

by the impact that a reduction in the demand effect has on the incentives to provide reliability. In particular, an increase

in the likelihood of requesting a replacement of defective units decreases the demand effect by reducing the probability

of scrapping faulty units. Notice, however, that any increase in the number of claimants also increases the replacement

effect as more consumers will now request a replacement. We prove that any increase in the number of claimants

induces a reduction in the product’s reliability.

Second, we show that an increase in the number of claimants increases the firm’s profit. There are two effects when

the number of claimants increases: consumers’willingness to pay increases anticipating that is more likely they can

turn to the firm instead of scrapping the product;

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but also the firm’s expected cost of replacements increases as

consumers are more likely to request replacements.

4

In the benchmark case, we show that any increase in the number

of complaints induces an increase in profit. Additionally, the firm’s profit and social welfare are aligned; the increase in

claimants increases the firm’s profit and social welfare albeit it reduces the product’s reliability.

In this benchmark case, reducing consumers’claiming cost and increasing the number of socially desirable

claimants are linked together by the simplifying strong assumption that claimants have always zero claiming cost. This

scenario is extended to a more complex (and realistic) case where consumers have heterogeneous claiming cost and

they choose whether to pursue a replacement of a faulty product even when it may be quite costly to do so (or even

socially undesirable). In particular, a reduction in consumers’claiming cost may increase the number of claimants but

it may decrease the firm’s profit; similarly, when complaints are socially undesirable, social welfare may also decrease.

Moreover, if a reduction in consumers’claiming cost that increases the number of claimants has a small impact on

increasing consumers’willingness to pay, product reliability may also increase. This may happen when the demand

effect does not decrease and there is an increase in the replacement effect due to more replacement requests.

Consequently, it is not obvious the extent of our results presented in the benchmark case. We show that the main

results still hold under mild assumptions over claiming cost distributions in the following way. We prove that when the

expected benefit a claimant obtains from requesting a replacement is high enough, any reduction in consumers’

claiming cost induces an increase in the number of complaints and profit and a reduction in product’s reliability.

Additionally, when the benefit a claimant obtains from requesting a replacement is high enough firm’s profit and social

welfare are aligned; then, a decrease in consumers’claiming cost increases the firm’s profit and social welfare albeit

reduces product’s reliability.

The key assumption over distributions is to assume that when a reduction in consumers’claiming cost motivates an

increase in the number of claimants, it also reduces the expected cost of claimants; in the limit, expected claiming cost

is zero (or small). That is, the expected claiming cost to be decreasing in the number of claimants. Under this

COLEFF

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