Quality assurance
Quality assurance
The three problems of quality
▪
Defining it right
♦ Multidimensional
♦ Optimum ≠ Maximum
▪
•
“Total quality”, “Zero defects”
Controlling it
♦ Quality control & Standardization
•
•
▪
Old in manufacturing: interchangeable components (19th century)
New in services: e.g., mail, courier  “Just in Time” production
♦ Contractual or “motivational” problem
Assuring it
♦ Adverse selection & moral hazard
♦ Managing reputation and brands
•
•
•
Crisis management: “Tylenol” vs. “Perrier”
Role of advertising
Role of specialists: certifiers, auditors, etc.
Types of goods considering when
users know quality
▪ Search: before purchasing
♦ Apartment
▪ Experience: after purchasing
♦ Car
▪ Credence: never
♦ Surgery
▪ Problem: This classification is ambiguous
Think it in terms of product attributes
Attributes
Goods
Search
Experience
Credence
Apartment
Place
Noise
Asbestos
Car
Space, color
Breakdowns
Accident risk
Surgery
Accessibility
Waiting time
Real need of
surgery
Ambiguities remain
▪ Is a sexy ad informative (associated to
“search” attributes)?
♦ Or is it persuasive (linked to “experience”)?
▪ Are credence attributes really never
observed?
♦ With zero probability?
Exercise: Identify search, experience
and credence attributes in:
▪ Decaffeinated coffee
▪ Pet with pedigree
▪ Husband
▪ Wife
▪ Roommate
▪ Newspaper
▪ Graduate school
▪ Political party in an election
Four situations in Economics
Fixed Quality
adverse
selection
Variable
Quality moral
hazard
One-shot
transaction
“Lemons’”
problem:
Used cars
Home
renovation,
conveyancing?
Repeated
transactions
?
New cars
The 4th situation is the most
(perhaps the only?) relevant
▪ Firms provide repetition
♦ Carmax (large seller of used quality-guaranteed
cars)—visit http://www.carmax.com/
♦ “Crear Hogar” (“Build Home”—Corte Ingles’ home
renovation division)
▪ Quality is not fully “given”—e.g., Carmax:
♦ inspects and recondition cars
♦ sells many cars, of different quality
♦ guarantees (therefore, increases quality to a given
standard when the car turns out to be a lemon)
How Reputation Works
▪ Reputational investment = start by selling good
▪
quality (q) at price of observable quality (q0)
Motivates producer to sell good quality (q) in
future periods b/c she earns a quasi-rent:
♦ Price
♦ p(q)
=
=
Cost +
c(q) +
Quality Premium
r {c(q) - c(q0)}
▪ Quality premium is the normal return (r) on the
▪
reputational investment
Other reputational investments: e.g., advertising,
“renting” reputation
Supply as a function of quality
p
p(q) = c(q)+r[c(q)-c(q0 )]
c(q)
Quality
premium
c(q 0)
q
q0
“Renting” reputation
▪ Specialists in “lending” reputation
♦ Examples in capital markets:
•
▪
Starting up  venture capitalists and, for IPOs, investment
banks
Continuous basis  auditors and financial analysts
Bankruptcy  restructuring specialists
•
•
Non specialists: mainly large retailers
♦ Retailers’ as signal producers
♦ Retailers’ brands
The logic of guarantees
▪ Solution to sellers’ information advantage
♦ Provide assurance  adverse selection
♦ Motivate quality  moral hazard
▪ As most solutions, causes new problems
♦ Adverse selection: e.g., intensive users
♦ Moral hazard: misuse
Efficiently limiting guarantees’
coverage
▪ Avoids moral hazard
♦ Requiring due care
♦ No covering indirect damage (cost of accident)
▪ Avoids adverse selection
♦ Use limit (e.g., 100k km)
♦ Requiring non-professional use