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

Jose A. Guajardo (), Morris A. Cohen () and Serguei Netessine ()
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Jose A. Guajardo: Haas School of Business, University of California, Berkeley, Berkeley, California 94720
Morris A. Cohen: The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
Serguei Netessine: INSEAD, Singapore 138676

Management Science, 2016, vol. 62, issue 7, 1860-1877

Abstract: 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 estimate a median willingness to pay for one year of a warranty of approximately $850, which is equivalent to 3.1% of the median vehicle price in our sample. We find that, for a car with median characteristics, the effect on consumer utility of a 1% price decrease is equivalent, all else being equal, to increasing product quality by 2.2%, and is in turn equivalent to increasing the warranty length by 8%. Our results also 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 thus imply that, in our period of analysis, warranties played a more important role for American firms than for foreign firms, consistent with the fact that American manufacturers exhibited lower product quality and higher service quality than non-American firms. This paper was accepted by Martin Lariviere, operations management .

Keywords: after-sales services; quality; competition; demand; econometrics (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (22)

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