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Customers’ complaints and Quality Regulation [Job Market Paper]

This paper studies the informativeness of customer complaints and their potential as a regulatory tool in contexts in which quality is not verifiable and consumers cannot (fully) appropriate the benefits of their complaints. The conventional wisdom about complaints is that the smaller the number of customers that complain, the better the market performs. However, its theoretical foundations are unclear. On one hand, consumers may be well informed about the quality of the service they received and hence, more complaints may be indicative of lower quality. On the other hand, empirical evidence suggests that complaints are driven by expectations as well as by actual quality. Hence, consumers' complaint decisions are based on the difference between the quality they received and some reference point. Combined with the existence of different degrees of free riding, this implies that consumers’ incentives to complain may vary across markets and along time. As a result, more complaints may reflect higher expectations or lower free riding incentives and not lower quality. The paper identifies conditions under which complaints may help overcome the regulators' lack of information about the firm's investment. It is shown that consumer complaints are not always informative and that this lack of informativeness can be worsened by the repeated interaction between the firm and the consumers. Furthermore, the paper shows that the absence of a reference point results in the proportion of complaints being independent of the realised level of quality (and hence, even less informative).

Prices, Reviews and Endogenous Information Transmission

Empirical evidence suggests that online reviews are an important source of consumers’ information and a relevant determinant of the firms’ revenues. Little is known, however, about how prices and reviews affect each other. This paper proposes a dynamic game to investigate this relationship. A long-lived monopoly faces a sequence of short-lived consumers whose only information about the value of an experience good is the one contained in the reviews completed by previous buyers. Neither the monopoly nor the firm have private information about the value of the good. After buying, the consumers observe a quality realisation that is correlated with the actual value of the good. Then, the consumers decide whether to complete reviews. The consumers complete reviews according to a social rule that maximises the present value of current and future consumers’ utility. Reviews increase the information the firm and the future consumers have about the value of the product. It is shown that a necessary condition for the existence of reviews is that the firm cannot fully appropriate the surplus generated by this increased information. Furthermore, the reviews induce a mean preserving spread on the posterior beliefs about the value of the good which, combined with the convexity of the utility and profit functions, implies that reviews are valuable for the consumers and for the firm. Hence, both parties are willing to face some cost in order to increase the information available in the market. From the firm's perspective, this cost takes the form of a “discount” in the price offered to current consumers.

Information and Energy Consumption – Evidence from UK (Work in Progress)

This paper uses data from the ''Energy Demand Research Project'' (EDRP) to study consumers’ response to improved information about their energy usage. Even though the EDRP considers several sources of information, the main research question is related with the impact of smart meters. It has been argued that these meters should have a greater impact on energy demand than other sources of information because they provide consumers with accurately and real time data. However, smart meters constitute an expensive technology and thus the magnitude of the expected energy saving is a relevant policy question. The data from the EDRP further allows comparing the efficacy of smart meters relative to other information technologies. Preliminary results suggest that information about energy efficiency may not be enough in itself to trigger energy savings. They also suggest that the ability to translate information or learning into a smaller energy demand depends on the household income. An inefficient set of appliances may prevent low-income households from reducing energy consumption.