The paper investigates the linkages between customer service, customer satisfaction, and firm performance in the US airline industry. In particular, the moderating effects of market concentration and firm dominance on the service–satisfaction–performance relationship are examined. Our major finding is that market concentration dampens the relationship between customer satisfaction and airline profitability. Although the same moderating relationship was not found for market power, these results, combined, indicate that airlines can increase profits in concentrated markets without providing for the same, concomitant increases in customer satisfaction as airlines operating in more competitive markets. From a public policy perspective, our results point to the importance of regulators monitoring airline actions, such as mergers and alliances, that serve to increase the concentration of markets, but may result in lower levels of customer satisfaction.
There has been considerable research done on investigating the relationship between customer service, customer satisfaction and firm performance. A firm should be able to increase customer satisfaction by improving its customer service, ultimately leading to better firm performance. A number of research papers in Accounting, Operations Management, Marketing, and Transportation and Logistics have found these links (e.g., Banker et al., 2000, Behn and Riley, 1999, Anderson et al., 1994, Anderson et al., 1997, Anderson and Mittal, 2000, Capon et al., 1990 and Dresner and Xu, 1995). However, other research has found an inconsistent relationship between customer service, satisfaction and performance (e.g., Anderson and Mittal, 2000, Johnston et al., 1990, Johnston, 1995, Mersha and Adlakha, 1992, Ittner and Larcker, 1998 and Arthur Andersen & Co., 1994). The first objective of this paper is to investigate moderating variables that may influence the linkage between customer satisfaction and performance. In particular, we examine how this relationship may be moderated by market structure variables; notably market power and market concentration. We hypothesize that when a market is less competitive, either due to firm dominance or to high concentration in a market, then the link between customer satisfaction and firm performance will be weak. The rationale for this conjecture is that when a market is less competitive, there are fewer options open to customers. Even dissatisfied customers will purchase products or services from firms operating in these markets. Therefore, there will be fewer incentives for firms to improve their customer service in order to increase satisfaction.
A second objective of this study is to examine potential non-linearities in the relationship between customer service and customer satisfaction. Most of the empirical work has modeled a linear relationship between service and satisfaction (e.g., Sim et al., 2010, Yee et al., 2008, Yee et al., 2010, Homburg et al., 2005, Nagar and Rajan, 2005, Behn and Riley, 1999 and Riley et al., 2003). However, there could very well be diminishing marginal returns to the provision of customer service. Therefore, the impact of customer service on satisfaction could depend on the level of services being provided. At low service levels, increases in services could produce significant changes in satisfaction levels. But at higher service levels, changes in satisfaction could be less significant due to diminishing marginal returns. Thus, we allow for nonlinear relationships in our model.
Following the work of Dresner and Xu (1995), we use the airline industry as the market setting for our research. The airline industry provides an excellent setting for the study of the service–satisfaction–performance relationships because of the publically available data on all three types of variables. In addition, airlines compete on defined origin–destination routes, so market structure variables can be computed from public data.
The remainder of this paper is organized as follows. Section 2 provides a brief literature review and presents our hypotheses. In Section 3, the research model is developed and the data and variables described. Our results are presented in Section 4 and discussed in Section 5. Section 6 concludes the paper.
Researchers in several different fields have examined the linkages between customer service, customer satisfaction and performance (e.g., Dresner and Xu, 1995, Behn and Riley, 1999, Banker and Mashruwala, 2007 and Sim et al., 2010). Although the majority of the studies have found positive relationships among these variables, a significant number of research papers have not. The main contributions of this paper to the existing literature are that we examined two potential moderating variables that may affect the satisfaction–performance relationship, namely market structure and market power. In addition, we allowed for non-linearities in the relationship between customer service and customer satisfaction to account for diminishing marginal returns to customer service. Finally, using our results, we are able to calculate “optimal” levels of customer service; that is, the levels of customer service that result in maximum profits for the firms in our dataset.
Our major finding is that market concentration moderates the relationship between satisfaction and profitability for US airlines. Airlines that operate in concentrated markets have fewer incentives to satisfy their customers than airlines that operate in more competitive markets. Although the same moderating relationship was not found for market power, when HHI was omitted from the profit equation, Mktshare did become significant. These results, combined, indicate that all firms, both big and small, benefit by operating in less competitive markets in terms of increasing their profitability without having to concomitantly increase customer satisfaction. Since providing higher levels of customer satisfaction is not cost free ( Dresner and Xu, 1995), all airlines, including those with low market shares, can profit by operating in highly concentrated markets. Thus, the recent merger wave that has taken place in the US domestic airline industry should provide higher profits to the airlines, given that the mergers are likely to make routes more concentrated. From a public policy perspective, our results point to the importance of regulators monitoring airline actions, such as mergers and alliances, that serve to increase the concentration of markets, but may result in decreased customer satisfaction.
Secondly, as hypothesized, we find nonlinear relationships between three of our customer service variables and customer satisfaction. These nonlinear relationships point to optimal levels of customer service that can be provided by an airline. Indeed, using the results from our analysis, we are able to calculate the levels of customer service at which profits are maximized.
A limitation of the paper is the use of firm-wide data on the service attributes and on profitability. Given that airlines compete at the route level, we would have preferred to have estimated our models at the route level. However, two of the customer service measures (lost bags and bumped passengers) are only available at the firm level. Likewise, profitability is only available at the firm level. Therefore, a firm-level panel model needed to be estimated. Given this level of aggregation, we may have not found significant relationships where, in fact, these relationships exist.
A potential future research area emanating from this study is the examination of the moderating effect of competition on the service–satisfaction relationship. In this paper, we just examined the moderating impact of competition on the satisfaction–profitability relationship. It is possible that in very competitive markets, the relationship between service and satisfaction may be blunted by high customer expectations.
