Quality Management and Provision in Repeated Trade: Apple Laptops as an Example - Prof. Ha, Apuntes de Negocios Internacionales

¡Descarga Quality Management and Provision in Repeated Trade: Apple Laptops as an Example - Prof. Ha y más Apuntes en PDF de Negocios Internacionales solo en Docsity! TOPIC 5: QUALITY AND MANAGEMENT (ideas from contracting firms +others) 0) Scenario: When apple sells this laptop, you BELIEVE what this computer has (reading the description they give to you), you DON’T KNOW if all that is said is true or false. 1) Quality and associated problems: • QUALITY (two definitions): • The product has a very high value (not in this topic) –National geographic has good quality and the big brother don’t-. • Simply characteristic of a good (color, taste, durability, price, etc.). Each good has many attributes. Would you rather use a postal service that always delivered letters in four days or sometimes in two days and sometimes in six? – no, because i won’t never know when to send the letter. 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? – more difficult the one that you can’t predict. What are the implications for quality? – it has to be always the same. Predictable, i need to know how the good will be. STANDARDIZATION: providing a good with a known fix quality. • The major goal of firms is to provide goods of standard quality. A Firm is good at managing quality when manages to provide standardized products to customers. • 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). How can companies achieve this? – 3 challenges. 1- Define quality F 0 E 0 market research. Design the product, the marketing strategies… “What are you going to sell?” 2- Control quality in a technical sense F 0 E 0 monitor both the performance of the factory and customer satisfaction. “Put in place the systems to produce this products” 3- Safeguard quality F 0 E 0 actually provide the quality level that customers expect to buy. “how to make that the product you produce is equal to consumer’s belief they are buying” Failures to provide quality: • Perrier: traces of benzene. Pills supposed to cure killed people. • Tylenol: traces of cyanide. • Dasani: purified tap water in UK. Water consumers expected to buy “puresa natural” but it actually was filtred tap water. (the expectations didn’t fit the product) • Toyota: faulty accelerator pedals. Middle cass, safe, functional, that were some Toyota’s attributes until the faulty accelerator pedals. They didn’t provide what they said to be doing. How can companies avoid this?? F 0 E 0 Safeguarding quality. The problem of safeguarding quality depends on the kind of good in question. A key distinction is whether consumers can observe quality before buying or not. TYPE OF GOOD DEFINITION + TYPICAL PROBLEMS EXAMPLES SEARCH Products whose quality can be verified before purchase - To lower information cost for customers Bank accounts, financial products EXPERIENCE Products whose quality is learned after consumption. - How to convince customers that the quality is the promised one. Restaurant dinner, haircut CREDENCE Good whose quality is not observable even after consuming. It may be observable only in the long-run or even never. - a very serious problem of convincing customers of level of quality. Surgical operations, car repairs. Every good has different attributes but one is the main one. In fact it might make more sense to think about search, experience, and credence attributes rather than goods. For example, price is always observable, a good’s durability is almost never. 2) One time trade with unobservable quality (Safeguarding one-shot transactions) Consider a situation in which a buyer and a seller interact once in a market. The buyer of a good does not know its value but the seller does. What was the problem here? –Adverse selection. A high value good is not traded because of preference of low value good. If customer could know which one is the best good (the one with better quality) he would choose it. What did we say the solutions were? • Signaling • Screening • Give verifiable information • Companies get the information and sell it. Interesting fact: the mere fact of purchasing a new car reduces its value 10%. A car has some experience attributes, it means that we won’t know them until we have used it. If once we have used it we want to sell the car again, that means that something in the car hasn’t liked us. It means that something didn’t fit our expectations, and, in consequence the future consumers’. a) PRIVATE SOLUTION I: 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 –drivers” b) 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. (an information market) Suppose there’s a company specialized in gathering all the information for you (customer), you don’t have to do it. It’s easier for them because ……? Example: The latin American taxi market is very large (3.8 bilion taxi rides per year). There are serious information asymmetries: overcharging is commo; robbery is not infrequent; kidnapping is reported… Business Opportunity: in 2011, Clemens Raemy started SaferTaxi, and company aimed at the taxi markets in São Paulo, Buenos Aires and Santiago. Accompany that collected info that overcomes this lack of information. Customers use a mobile application to order a cab and select the best rated drivers. The ratings come from the customers themselves. Apple 3.000 euros for a computer: they set a high price, that’s an incentive for Apple to don’t misbehave to go on in the relationship. If they sell at 1.000, quality must be affected (cheat) and some people will stop buying and apple will have losses. • REPUTATION: The client does not observe the quality before contracting the painter; she is willing to contract the painter as long as she believes he will do a good job. This belief is the painters reputation: belief (expectation) you have about what action the seller is taking / of some good’s quality before having used them. If he ever does a bad job (if he cheat), his reputation is destroyed, and he does not work anymore, no more trades. Incentive: behave well to not loose reputation. 1- Consumer has a belief about the quality, so they are willing to trade (customer and seller) 2- Because the consumer is willing to trade, if quality is high, seller is willing to provide high quality. If he don’t provide high quality (what customer expects), seller will lose money in future from bad behavior. They won’t trade again. 3- Belief is correct or incorrect. Depends on if the good provided fits on the consumer’s belief. This customer belief is the reason you have this trade, the reason to the seller behave well. In this case the contract would be: I believe you’re going to behave. That’s the reason I’m behaving. • PROBLEM OF HORIZON: So far we said the relationship continues, But suppose one day it comes to an end. • What will the painter do the last period? Painter will misbehave, there’s no future, and there aren’t gains from being contracted. • What will he do the next to last period? – There are two options, trade with him at low cost or don’t trade. It happens the same day before day. The two big problems in sustaining trade in the repeated moral hazard environment are: • (1) Dealing with the last period problem • (2) Making sure the seller has a lot to lose from destroying future trades (é quasi-rents) How can make seller never die? Some solutions are: • Don’t specify time horizon: Leaving open the nature of the relationship can help solve the last period problem F 0 E 0 a more incomplete contract might be better! • Sell to many people; Making the seller never die: Another deeper solution is the development of “community reputation”. If you cheat one person, then everyone observes this and nobody will contract you. This is true in the online environments above. Also evidence that it helped sustain trade in the early middle ages. If you sell to different people maybe jut one won’t like your product. • Community reputation makes the buyer “live forever” if the community never dies • It also significantly increases the loss from cheating a single customer • Finally, it also helps overcome the severe information problems in the credence good case But: • The community reputation idea does not solve the problem of the seller having a finite horizon • All of us must retire some day, even if it’s on the day we die • What can we do? –make sellers never die. Their actions today will conditionate future immortal reputation. 1. INCORPORATION: • large amount of trade in goods of unknown quality are undertaken by corporations • Corporations are legal entities that never die • Incorporating has a few advantages (raising capital, protect employees from risk) • An extremely important one is that it creates an infinitely-lived entity with strong reputational incentives not to cheat. 2. BRANDING: • Another way of building a long-lived entity is to create a brand (this and incorporation not mutually exclusive) • Consumers do not buy the products of a specific person but of an abstract entity (usually some associated symbol) • When you think about McDonald’s you imagine Ronald McDonald, the symbol of tha brand. They never die, never change. The basic message here is that a firm’s commercial reputation is what allows it to sell goods of unknown quality to consumers without an explicit contract. The punishment for bad behavior is the loss of reputation which implies the loss of huge profits. Example: Beyond Petroleum: sun, nature, friendly, but in fact they aren’t, they actually are Bad Petrolium. Loss connection within brand and their actions. 4) Reputation as Asset: Commercial reputation is a valuable asset. So firms should invest resources to maintain a good image F 0 E 0 “brand control”. Invest money in maintain image. Example: Mike the sensation used to wear Abercrombie assets. This brand is known for push people and that man was destroying Abercrombie image. A. paid Mike to stop wearing their brand. He got money for free. • Brand Exploitation: • The previous example shows that one way of making money is to threaten to devalue a brand’s reputation (not yours) • For example: what happens if you write a bad review of a hotel or restaurant? –Hotel will invite you to stay again and enjoy your time to change your opinion. It just works in the first times, then you as a consumer loose your reputation. • Deeper point: creation of reputation to solve an opportunistic behavior creates a new kind of opportunistic behavior.(win money tiring to destroy others reputation). • Firms want to protect their assets: • Pay this guy to stop wearing its cloths • Protect physical assets easier than reputation. • Palliatives: • Regulation: • Legal system punishes defamation (info not true) • Copyright and trademark system • Decentralized system: • Reputation of attacker (the boy who cried wolf –he lost his reputation.) • Building a Reputation: Not having a reputation is in some sense as bad as losing a reputation. How can firms generate a good reputation, which in turn gives them incentives to invest in quality? • Introductory pircing: Giving the product for free during a period and let the consumer know the quality it has. Then the consumer gets used and wants to pay for it. Why does La Vanguardia occasionally give away newspapers for free here at UPF? • Stretch reputation: Companies with previously established reputation can establish new products. Providing poor quality in these new products would damage the existing products, so they have good reputation to have good quality. The new products should provide a similar quality level as the old ones, why? To maintain their reputation. If they produce in less quality, their reputation goes away. They want to maintain the quality of their products, producing always in the same quality to go on with their image. • Brand Stretching: When a name alone is enough to create reputation. Example: Dior and Armani. They started in very expensive fashionable clothes, with good quality. They convinced the world about it. Then Dior started to produce jewellery, why he should do good jewellery? His brand said this. He wouldn’t produce something that could damage his image. • Creating new Brands: if you want to produce in a different quality of your original brand (the one that already has reptutation) you create a new one. If they want to create a different image. Example: Armani Exchange is a brand of Armani but that produces in a less quality. He created a different brand to not damage the original one. • How to get in a market with no reputation before?: Many new companies sell their products through established retailers (rely on their reputation). These retailers have their own reputations to maintain (e.g. El Corte Inglés). If they sell low quality products, their reputations suffer. Retailers can themselves engage in “brand stretching” by selling their own products (e.g. Hacendado) • Advertising: Advertising is a controversial subject in economics. Does it have any role for “rational” consumers? In the context of search goods, it can act to deliver information; this is called “informative” advertising. But is this really what ads do? • Informative ads: • Is there information in the more quality goods ones? –No, they are more creative denoting more money invested, so more quality of the product. Increase utility of consumers from consuming products F 0 E 0 but then why don’t people watch ads for fun? • Generator of quasi-rents: When a firm advertises, one could argue that it is implicitly telling consumers that its product is high quality Why would firms spend a lot of money advertising a product that they then were planning to use to deceive consumers? • Credible signaling: A related idea is that of advertising as a signal of quality. Here the difference is not on the cost side, but on the benefit side. In a repeated sales context, consumers might be fooled once but not twice. Not for difference in price, but difference in benefits. Ex: Suppose a firm can purchase an ad for 60 prior to a consumer deciding whether to purchase the good in each of two periods. The price of the good is fixed at 50. At this price, the consumer is willing to purchase a high quality good but not a low quality good: • Ads cost 60 for all firms (opp cost)= 40