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

34 Pages Posted: 24 May 2012 Last revised: 4 Apr 2016

See all articles by Jose Guajardo

Jose Guajardo

University of California, Berkeley

Morris A. Cohen

University of Pennsylvania - The Wharton School

Serguei Netessine

The Wharton School, University of Pennsylvania

Date Written: February 2015

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 warranty of about $850, which is equivalent to 3.1% of the median vehicle price in our sample. Wend 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.

Keywords: Services in Manufacturing, Demand Models, Competition, Automobiles, Econometrics

Suggested Citation

Guajardo, Jose and Cohen, Morris A. and Netessine, Serguei, Service Competition and Product Quality in the U.S. Automobile Industry (February 2015). INSEAD Working Paper No. 2015/47/TOM/ACGRE. Available at SSRN: https://ssrn.com/abstract=2065762 or http://dx.doi.org/10.2139/ssrn.2065762

Jose Guajardo

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Morris A. Cohen

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104
United States

Serguei Netessine (Contact Author)

The Wharton School, University of Pennsylvania ( email )

3730 Walnut Street
Philadelphia, PA 19104-6367
United States
(215) 573 3571 (Phone)

HOME PAGE: http://www.netessine.com

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