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How Do Customers Respond to Increased Service Quality Competition?

36 Pages Posted: 12 Feb 2011 Last revised: 2 Mar 2016

Ryan W. Buell

Harvard Business School

Dennis Campbell

Harvard University - Accounting & Control Unit

Frances X. Frei

Harvard Business School

Date Written: February 26, 2016

Abstract

When does increased service quality competition lead to customer defection, and which customers are most likely to defect? Our empirical analysis of 82,235 customers exploits the varying competitive dynamics in 644 geographically isolated markets in which a nationwide retail bank conducted business over a five-year period. We find that customers defect at a higher rate from the incumbent following increased service quality (price) competition only when the incumbent offers high (low) quality service relative to existing competitors in a local market. We provide evidence that these results are due to a sorting effect, whereby firms trade-off service quality and price, and in turn, the incumbent attracts service (price) sensitive customers in markets where it has supplied relatively high (low) levels of service quality in the past. Furthermore, we show that it is the high quality incumbent’s most profitable customers who are the most attracted by superior quality alternatives. Our results appear to have long-run implications whereby sustaining a high level of service quality is associated with the incumbent attracting and retaining more profitable customers over time.

Keywords: empirical service operations, service quality competition, customer defection, firm performance

Suggested Citation

Buell, Ryan W. and Campbell, Dennis and Frei , Frances X., How Do Customers Respond to Increased Service Quality Competition? (February 26, 2016). Harvard Business School Accounting & Management Unit Working Paper No. 11-084; Harvard Business School Technology & Operations Mgt. Unit Working Paper No. 11-084. Available at SSRN: https://ssrn.com/abstract=1759545 or http://dx.doi.org/10.2139/ssrn.1759545

Ryan W. Buell

Harvard Business School ( email )

Soldiers Field Road
Morgan Hall 429
Boston, MA 02163
United States
617-496-6918 (Phone)

HOME PAGE: http://www.hbs.edu/rbuell

Dennis Campbell (Contact Author)

Harvard University - Accounting & Control Unit ( email )

Soldiers Field
Boston, MA 02163
United States

Frances X. Frei

Harvard Business School ( email )

Soldiers Field Road
Morgan Hall 411
Boston, MA 02163
United States

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