“Can You Hear Me Now?” Exit, Voice, and Loyalty under Increasing Competition

Abstract

Competition works only if poorly performing vendors can be punished. The principal vehicle for consumers to discipline ill-performing firms is to switch to alternative providers. But switching is not the only mechanism consumers have to express disapproval. While some unhappy consumers may choose to no longer buy the good or service, other consumers express their disappointment through complaining. This article examines Albert O. Hirschman’s conjecture that as industries become more competitive, consumers’ complaints give way to switching. It offers a simple description of the theoretical relationships among market structure, quality, and complaints. It then utilizes an extensive data set to explore the empirical determinants of consumers’ complaining behavior in the local-exchange telephone industry. These data overcome the problem that complaints can depend on both competition and quality, while competition also presumably affects quality directly. The estimations accommodate this complication and provide considerable support for Hirschman’s conjecture.[E]conomists have refused to consider that the discontented consumer might be anything but either dumbly faithful or outright traitorous (to the firm he used to do business with). (Hirschman 1970, p. 31)