Essays on the Role of Customer Expectation in Service Markets.

Abstract

Customer expectations have been considered as customers' pre-purchase beliefs or evaluative beliefs about a product or service. When making a choice, customers first construct their expectations of what is to come whenever they receive new information within a context that is based on the past events. From firms' perspective, a tension exists between raising expectations to increase initial acceptance/trial and lowering expectations to increase satisfaction, and hence future sales. As such, it should come as no surprise that service firms are interested in better understanding how consumers form expectations about quality to manage customer expectations over time. This thesis comprises of two essays where I demonstrate the role of customer expectation in (1) customer satisfaction and repurchase and (2) strategic customer behavior under bounded rationality and its impact on product switching.

In the first essay, I examine the value of measuring customer satisfaction. Many service firms keep track of customer satisfaction ratings, along with objective service performance, after each purchase transaction. I find that customer satisfaction provides additional information about customer purchase behavior over and above objective service performance. Unlike past research, these results are obtained after controlling for within-customer selection (of service encounters). Overall, the results suggest that measuring customer satisfaction is valuable because it helps firms to better predict their economic outcomes.

The second essay focuses on customers' product switching behavior based on their expectations under bounded rationality by modeling time-varying customer expectations under imperfect recall and their impact on product switching behavior over time. I find evidence of a decline in carryover of prior expectations and imperfect recall of previous service encounter, which supports my hypothesis on bounded rationality in customer expectations. Furthermore, the results show that customers strategically choose the same alternative that previously results in a free upgrade, anticipating yet another upgrade in a subsequent transaction.