A model for customer complaint management

A model of customer complaint management is developed in terms of defensive marketing strategy. Based on an explicit microfoundation, firms’ incentives to manage complaints are analyzed. In the context of a monopoly and homogeneous oligopoly, the authors discuss the optimal levels of customer compensation and effort and characterize industries where complaint management is likely to be used. They then examine a differentiated oligopoly and find an explicit formula for the market share gains associated with complaint management. This is illustrated in an example with real data. The authors finally consider the trade-off between defensive strategy in the form of complaint management and various offensive marketing tools such as advertising and pricing.