Exit and Voice: An Economic Theory of Customer Complaint Management

Abstract

We develop a multiagent-principal model with participation decision to address customer complaining behavior and the management policy. The noisy informed clients choose among costly complain, keep silence, and exit, and the company decides the complaining barrier and whether to undertake corrective investment. We study the Bayesian-Nash equilibrium of this game, and identify the optimal mechanism which suffers from multiple equilibria and the suboptimal mechanism with unique equilibrium. It's shown that the truthful announcement occurs only under moderate complaining barrier. The observed low complaint/dissatisfaction ratio and costly complaint may arise by discretion of company. Company's reputation, the variation in quality, and competition pressure are identified as determinants of complaint management mechanism. Company, in particular weak reputation one, would set socially excessive complaining barrier. Competition may not improve efficiency in complaint management in the sense that suboptimal mechanism is more likely to be selected under competitive pressure. We further investigate the manipulation of mechanism to induce best equilibrium outcome in dynamic adjustment process.