Thursday, February 27, 2014

Service Competition and Product Quality in the U.S. Automobile Industry

GUAJARDO Jose A., COHEN Morris A., NETESSINE Serguei
Read the working paper
INSEAD Working Paper 2014/15/TOM/ACGRE revised version of 2012/54/TOM/ACGRE

We study the impact of service attributes (warranty length, after-sales service quality) on consumer demand in the U.S. automobile industry, examining the presence of complementarities/substitution between service attributes and product quality. 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, all else being equal, to increasing product quality by 3% and to increasing the warranty length by 9%.