Wednesday, May 23, 2012

Service Competition and Product Quality in the U. S. Automobile Industry
INSEAD Working Paper 2012/54/TOM/ACGRE 

We formulate a structural econometric model to analyze the impact of service attributes (warranty length, after-sales service quality) on consumer demand in the U.S.automobile industry. Our results indicate that service attributes play a compensatory role with respect to product quality, i.e., the impact of warranty length and service quality on demand increases when product quality decreases. Conversely, both service metrics are complementary with respect to demand, i.e., the better the service quality, the higher the marginal effect of longer warranties. Our results estimate a median willingness to pay for one year of warranty of about $850, which is equivalent to 2.5% of the average vehicle price in our sample. We find that, for an average car in our sample, the effect on demand of a 1% price decrease is equivalent to increasing product quality by 3%, which is in turn equivalent to increasing the warranty length by 9%.