Quality and associated problems , Apuntes de Negocios Internacionales

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Topic 5:

Quality and Management

Outline

• Quality and associated problems
• One time trade with unobservable quality
• Repeated trade with implicit contracts
• Explicit contracting solutions

Thought Experiment

• Would you rather use a postal service that always delivered letters in four days or sometimes in two days and sometimes in six?
• Would you find it more difficult to have a friend who always arrived 30 minutes late or sometimes on time and sometimes an hour late?
• What are the implications for quality?

Standardization

• A major goal of firms is to provide goods of standard quality
• In this sense a company like McDonald’s can claim to manage quality well
• Managing quality well is ultimately about increasing profits
• Many firms place a huge emphasis on it (TQM)

Failures to Provide Quality

• Dasani: purifed tap water in UK
• Toyota: faulty accelerator pedals

Safeguards and Good Type

• The problem of safeguarding quality depends on the kind of good in question
• A key distinction is whether consumers can observe quality before buying

Experience Good

• An experience good is a good whose quality is learned after consumption
• Examples: restaurant dinner, haircut

Credence Good

• A credence good is a good whose quality is not observable even after consuming
• It may be observable only in the long-run or even never
• Examples: Surgical operations, car repairs

Ambiguity in Classification

Goods

Characteristics

Search Experience Credence

Apartment Place Noise Asbestos

Orange Size, Color Taste Chemicals

Surgery Accessibility Waiting Time Required

14

Typical problems Search goods To lower the information cost for customers

Experience goods How to convince customers that the quality is the promised one

Credence goods A very serious problem of convincing customers of level of quality

Private Solution 1

• One option is to eliminate the information asymmetry
• For example, used cars are often sold among friends, and these are higher quality than the average used car
• Also, sellers often let prospective customers examine products, for example car “test- drives”

Private Solution II

• Information asymmetry may in fact be a market “opportunity” for firms to provide value
• Companies like rating agencies in financial markets and Consumer Reports make money by gathering and selling information

SaferTaxi

• In late 2011, Clemens Raemy started SaferTaxi, and company aimed at the taxi markets in São Paulo, Buenos Aires and Santiago
• Customers use a mobile application to order a cab and select the best rated drivers
• The ratings come from the customers themselves

Performance

• 50,000 customers and 2,000 taxis
• Company gets 11.5% of taxi’s revenues
• Attracted venture capital funding from same group that previously funded Skype and Baidu