Quality-Adjusted Consumer Surplus: Measurement, Effects, and Determinants in Online Markets

40 Pages Posted: 1 Nov 2014 Last revised: 16 Dec 2016

See all articles by Yili Hong

Yili Hong

Arizona State University (ASU) - W.P. Carey School of Business

Paul A. Pavlou

Temple University - Department of Management Information Systems; Temple University - Department of Strategic Management

Pei-Yu Chen

Arizona State University (ASU) - Department of Information Systems

Date Written: November 1, 2014

Abstract

The traditional measure of consumer surplus (CS) (willingness to pay minus price paid) is captured at the time the transaction takes place, implicitly assuming that actual quality received (ex-post) is identical to quality expected (ex-ante). However, when the exchange of goods does not occur simultaneously when the transaction takes place, and for services whose quality is difficult to be fully specified before the transaction, the traditional measure of CS may be biased because actual quality received ex-post may differ from quality expected ex-ante. Drawing upon the economics and satisfaction literature, we relax the assumption that consumers receive, ex-post, identical quality that they expected ex-ante, and we propose, operationalize, and test a quality-adjusted measure of CS (termed CS’) in the context of online markets for IT services.

Our empirical results first show that the traditional measure of CS systematically over-estimates surplus than the quality-adjusted measure CS’. Second, quality-adjusted CS’ better predicts consumers’ subsequent transactions (i.e., consumer continuance in the online market, number of future contracts, and total spending) while the traditional measure of CS fails to predict consumers’ subsequent transactions. This finding suggests that quality-adjusted CS’ is a more realistic estimate of consumer surplus by predicting future transactions. Building upon expectation confirmation theory, we examine the difference between the two surplus measures (termed ∆CS), which reflects “surprise utility” from ex-post confirmation of expectations. Surprise utility (∆CS) (either positive or negative) is determined by market immaturity, consumers’ lack of experience in the market, and consumers’ lack of familiarity with IT service providers. Implications for developing a more conservative (quality-adjusted) measure of consumer surplus that better reflects economic reality are discussed.

Keywords: Consumer surplus, online markets for IT services, surprise utility, expectation confirmation theory

Suggested Citation

Hong, Yili and Pavlou, Paul A. and Chen, Pei-Yu, Quality-Adjusted Consumer Surplus: Measurement, Effects, and Determinants in Online Markets (November 1, 2014). Fox School of Business Research Paper No. 15-049. Available at SSRN: https://ssrn.com/abstract=2517878 or http://dx.doi.org/10.2139/ssrn.2517878

Yili Hong (Contact Author)

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

HOME PAGE: http://yilihong.github.io/

Paul A. Pavlou

Temple University - Department of Management Information Systems ( email )

1810 N. 13th Street
Floor 2
Philadelphia, PA 19128
United States

Temple University - Department of Strategic Management ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

Pei-Yu Chen

Arizona State University (ASU) - Department of Information Systems ( email )

Tempe, AZ
United States

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