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With Hatred From Clients: On Optimal Feedback Management

Abstract: This paper investigates the clients' feedback in a multiagent-principal model. Customers are noisy informed about the true state and the company could invest in corrective action to change the true state, which affects the outcome of both parties. The company would set threshold responsive level and subsidy to elicit information (feedback) from clients and make right decision. It's shown that in equilibrium positive reports would never be induced by company, and efficient decision rule would be implemented if communication cost and outside option is low, otherwise company would overreact by commiting to responsive level lower than efficient one. However, this distortion vanishes as customer base increases, though substantive expenditure on feedback management would be needed. The social welfare implication is also discussed. We show that sometimes company may turn to ignore all feedback of customers and only focus on purchase behavior. Finally we investigate the consequence of limited commitment power of producer and establish that even the roughest feedback management policy could serve as a promise to ensure high future quality.
Key words: Strategic information transmission, Collective decision making, Mechanism design, Customer feedback
JEL Classification: D78, D82, L12, L15
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