Dynamic Formation of Quality Expectations: Theory and Empirical Evidence

Abstract

The evolution of quality expectations over time is an important driver of customer satisfaction and retention. This study investigated the dynamic properties of customers’ quality expectation updating from an analytical perspective and provides new evidence on the psychological correlates of the discrepancies between expectations and experiences in the realm of consumer decision making. In doing so, we focus on the dynamics of expectation formation by adopting a nonlinear complex systems approach based on well-established behavioral theories. Using stability analysis, we find analytical results which are supported empirically by an experiment that there is considerable heterogeneity in how consumers calibrate their quality expectations. Specifically, we demonstrate analytically that in some cases individuals will converge to a specific quality expectation (reach a stable fixed point), while in other cases their expectations will oscillate between a small number of points periodically. This is remarkable because the existence of the latter is not due to changes in quality performance but merely accrue endogenously and depend on individuals’ disconfirmation functions. To our knowledge, this is the first time in the marketing literature that the corresponding gaps between quality expectations and quality provided are analyzed in the long run. Our analytical and empirical findings also suggest that being more responsive to a person’s expectations can increase the portion of those individuals that are able to better calibrate. Finally, we also demonstrate that calibration ability is associated with how thoughtful or impulsive information is used to update one’s expectation. A more deliberative processing style, which includes using a wider range of information, seems to be related to fewer unrealistic expectations and better calibrations, while a more impulsive processing style is related to more unrealistic expectations. In addition to providing a better understanding of dynamic expectation formation, these results can pave the way for interventions that foster more accurate quality expectations. From a managerial perspective, our findings imply that communicating quality perceptions are only to a certain extent under managerial control. To recognize this, firms are advised to segment customers based on their information processing style and to customize their marketing actions accordingly.