Optimizing Service Failure and Damage Control
30 Pages Posted: 18 Dec 2015 Last revised: 11 Nov 2017
Date Written: November 6, 2017
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.
Keywords: Service Quality, Service Reliability, Service Failure, Damage Control
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