Doing Well By Doing Good: Essays in Service Operations

Abstract

This dissertation consists of three essays in Service Operations. The work is informed by the observation that a firm who views sustainability as an opportunity to innovate, can sometimes “do well by doing good.” In such situations, a self-interested actor maximizes her own outcomes (improving profits in essay one, decreasing cost in essay two, and minimizing risk in essay three) while simultaneously creating some positive externality (free medical care for the poor in essay one, a more efficient legal system in essay two, and a lower likelihood of sustainability failures in essay three).

The first essay, which is joint work with Ravi Anupindi and Hyun-soo Ahn, considers the single-period pricing problem of a monopolist serving consumers with private, heterogeneous willingness to pay for quality. A standard approach is to model as an adverse selection problem. Motivated by empirical evidence that consumer utility becomes discontinuous when service is free (e.g. “zero-price transaction utility”), we ex-amine situations where giving away service increases profit. We find that free service in-creases profit when (i) the transaction utility from free service is high, and (ii) the adverse selection pricing schedule results in a small margin for low-valuation customers. When these conditions are met, a pricing policy that serves some consumers for free generates higher profit, even in the absence of volume-dependent cost. When a provider benefits from economies of scale in cost and endogenously selects its target market, free service still increases profit when (i) and (ii) hold. To prove this result, we generalize the adverse selection model to allow for volume-dependent cost.

The second essay, which is joint work with Damian Beil, considers the sourcing of an extremely complex non-routine white collar service (outsourced litigation). In this setting, hourly “narrative” bills are commonplace, creating opportunities for the service provider (e.g., outside counsel) to drive up costs for the buyer through the inefficient use of time (e.g., rework) and resources (e.g., partner versus associate). The buyer can manage these costs with greater transparency about planned and completed processes; however, this transparency comes at a cost. Informed by work with a firm in this space, we take the perspective of a third-party provider of transparency for outsourced litigation and develop an analytical model of the value of transparency on var-ious litigation processes. We explore how overbilling opportunities, case complexity, and the outside counsel’s propensity for overbilling affect this value.

The third essay, which is joint work with Ravi Anupindi, experimentally considers the production decisions of a capacity constrained supplier with a portfolio of different buyer firms and the effectiveness of buyers’ potential strategic responses to the supplier’s choices. We consider both the relevant operational (e.g., wholesale price and order volume) and non-operational (e.g., the generosity of buyers’ retail price relative to the wholesale price offered) information used by the supplier when making their choice. Additionally, using both a between and within subject design, we show that suppliers do consider buyers’ retail price when making their production decisions. We then identify the key psychological drivers of this behavior. Finally, we consider how a savvy buyer can use this information to decrease the likelihood that their order is produced using unauthorized capacity.