Daniel Halbheer (), Eitan Gerstner and Oded Koenigsberg
Abstract: Conventional wisdom holds that service failure creates customer misery and reduces firm profitability. This paper challenges this view and shows that occasional service failure can be profitable for the firm when optional protection against the resulting customer misery can be marketed. It also shows that a firm that uses such a protection strategy inflicts a calculated misery on unprotected customers and wastes resources to provide the protection. Despite these inefficiencies, using the protection strategy can lead to market expansion and social welfare gains due to lower prices.
22 pages, December 17, 2015
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