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

SPEAKER: Jose Guajardo

ABSTRACT:

We formulate and estimate an empirical model to study the role of services as part of firm competitive strategies in the U.S. automobile industry. We analyze the impact of service attributes (warranty length, service quality) on demand, and the contingency of these effects upon product quality. Our results rule out complementarities between service attributes and product quality, and suggest that service attributes rather play a compensatory role with respect to product quality: the impact of warranty length and service quality on demand increases when product quality decreases. On the contrary, our results indicate that both service metrics are complementary with respect to demand: the better the service quality of a brand, the higher the marginal effect of offering longer warranties on demand. Collectively, these results suggest that competing on services is more effective (in terms of its effect on demand) for firms that have lower product quality, and imply that firms wo uld thus benefit by managing their product and service strategies jointly. The model formulation accounts for the endogeneity of prices and warranties, and allows for customer heterogeneity. Our results illustrate the importance of accounting for both effects in the estimation.