| Abstract: | We analyze a monopolist's pricing and product reliability decision in a model where consumers are entitled to product replacement if the product fails, but have heterogeneous costs of exercising this right. Our main result shows that, under some conditions, a decrease in consumers expected to claim cost leads to a decrease in product reliability but an increase in profit and welfare. This result is robust to a number of extensions. Our results are in line with anecdotal evidence suggesting that changes in consumers’ claiming cost can be induced by both third parties (governments, consumers’ organizations, private enterprises, etc.) and firms. More precisely, since, under some conditions, profit and welfare align, public initiatives oriented to lower consumers’ claiming cost will be ultimately joined by firms that benefit from further increases in complaints. |
