Optimizing service failure and damage control

Should a provider deliver a reliable service or should it allow for occasional service failures? This paper derives conditions under which randomizing service quality can benefit the provider and society. In addition to cost considerations, heterogeneity in customer damages from service failures allows the provider to generate profit from selling damage prevention services or offering compensation to high-damage customers. This strategy is viable even when reputation counts and markets are competitive

Claiming the credit

Impartial decisions in the best interests of the organisation are more elusive than you might thin

Price and quality decisions by self-serving managers

We present a theory of price and quality decisions by managers who are self-serving. In the theory, firms stress the price or quality of their products, but not both. Accounting for this, managers exploit any uncertainty about the cause of market outcomes to credit positive results to the dominant, “strategic” factor and blame negative results on the other—as doing so is psychologically rewarding. The problem with biased attributions, however, is that they prompt biased decisions. We motivate this argument with evidence from one experiment and then develop a model to understand the cost of the bias under different market conditions. Counter to intuition, we find that firms in a competitive setting can profit from the self-serving nature of their managers

Sampling Information Goods: How much Should be Free?

One of the major impacts of the Internet has been the vast increase in the amount of information that became available "for free". The provision of free information, or more specifically how much information to give away for free as a viable business model, has puzzled many observers as well as managers. To study this problem, we address two related questions: First, what portion of the information good should be offered as a free sample? Second, how much should a firm charge for the full version? To address these questions, we develop an analytical model, in which a firm offers both a full version and a free sample, on which it earns advertising revenues. Taking into account customers' initial valuation (willingness-to-pay) and their experienced quality with the free version, we characterize the optimal sample portion that should be offered for free and the price of the paid version. For both cases where either free sampling aims to persuade all consumers to buy or only those with high willingness-to-pay, we find that is optimal for the firm to offer a larger free sample when customers underestimate product quality. Our model assumptions and results are generally consistent with an empirical analysis of actual firm data on the market for news. Next, we compare the models’ implications with managerial decisions and show that managers have a tendency to underestimate the impact of free samples when consumers will use them extensively in updating their expectations about product quality

Managing service shutdowns: Cash refunds or vouchers?

Service shutdowns—extended disruptions of operations—caused by exogenous events are on the rise. Such shutdowns pose major challenges for service providers, customers, and regulators. Providers prefer vouchers as a means of service recovery to limit bankruptcy risk, whereas customers demand cash refunds or vouchers that include a generous bonus. Regulators, on the other hand, insist that customers must be granted the right to be reimbursed in cash. This paper shows that a zero bonus is optimal under the voucher-only strategy, whereas the provider should always include a positive bonus with the voucher under the hybrid strategy that allows customers to choose between the cash refund and voucher options. Surprisingly, despite its higher flexibility in service recovery design, the hybrid strategy can be dominated by the voucher-only strategy in terms of profit and welfare. Moreover, we show that the ranking of strategies differs across the two important dimensions of expected profit and survival under shutdown. Finally, we study competition among providers and show that a high-quality provider is more likely to use cash-back as the service recovery strategy than its low-quality competitor

Deregulating Network Industries: Dealing with Price-quality Tradeoffs

This paper examines the effects of introducing competition into monopolized network industries on prices and infrastructure quality. Analyzing a model with reduced-form demand, we first show that deregulating an integrated monopoly cannot simultaneously decrease the retail price and increase infrastructure quality. Second, we derive conditions under which reducing both retail price and infrastructure quality relative to the integrated monopoly outcome increases welfare. Third, we argue that restructuring and setting very low access charges may yield welfare losses, as infrastructure investment is undermined. We provide an extensive analysis of the linear demand model and discuss policy implications. Copyright Springer Science+Business Media, LLC 2006Infrastructure quality, Deregulation, Investment incentives, Access charges, Regulation, D43, L434,