Essays on Service Strategies: Evidence from Banking and Healthcare Industries

The primary objective of this dissertation is to provide insights for service providers in general, and retail bankers and hospital administrators in particular, that will help them improve their operational efficiency and effectiveness. In doing so, this dissertation consists of three essays that develop multiple service operations strategies, that identifies key elements affecting efficiency and effectiveness in two key critical industries: banking and healthcare. We contribute to service operations strategy research and practice by incorporating multi-disciplinary theories and approaches from marketing, economics, and quality management. Although operations researchers and practitioners alike realize the importance of productivity and effectiveness, they are largely unaware of more advanced techniques to achieve this goal. This dissertation fills, in part, this gap and leads one to understand research agendas in service strategy. In particular, this dissertation applies new theories and methods illustrating how bankers can improve efficiency. Moreover, it describes how hospital administrators can better understand the `hidden\u27 costs of quality failures that associated with hospital readmission as well as the impact of the recent Medicare penalty plan on hospitals and patient welfare. We employ different methods (frontier efficiency estimation, econometrics, structural estimation, and principal-agent models) to critically analyze banking and healthcare industries. The first essay deals with banking industry; the second and third essays are inter-related topics dealing with healthcare services. The first essay integrates diffusion theory from marketing literature and path dependency theory from economics into service operations management to estimate and compare efficiency of banks operating in the U.S. and in India. We develop and empirically test two hypotheses based on diffusion theory and path dependency theory. The hypotheses are tested using data from banks operating in the U.S. and India and estimate efficiency using free disposal hull (FDH) estimator instead of the widely used data envelopment analysis (DEA) estimator. We note that the DEA estimator imposes convexity of production frontier whereas FDH estimator does not. Our empirical analysis, rejected the assumption of convexity of production frontier; and we are the first in the operations management literature to employ these empirics to test assumptions that are typically held to be true, but not validated, when employing DEA analyses. The second essay develops a theory-based econometric model to investigate the effect of readmission rate on marginal cost incurred by a hospital. We use secondary data derived from multiple sources, including Center for Medicare and Medicaid Services. We apply an inversion method and structural estimation procedure developed in the empirical Industrial Organization and econometrics literature to estimate marginal cost of a hospital associated with readmissions using data on all Arizona hospitals. This essay also demonstrates the effect of the recent Medicare penalty on average readmission rate of all hospitals in the state of Arizona by using counterfactual analysis with and without stochastic shocks in hospitals\u27 investment to reduce readmission rates. The revised price charged by acute care hospitals after the elimination of critical access hospitals is also estimated as another counterfactual analysis. These analyses are very timely since patient protection and affordable care act (PPACA) was enacted recently, which penalizes hospitals with readmission rates higher than threshold readmission rates set by the government. Thus, in addition to research and practice, this essay offers strong policy insights. The third essay formulates an analytical model to evaluate the potential impact of PPACA on hospitals (providers), the government, and patients. We build a model of \u27readmission\u27 with uncertainty for hospitals and use the principal-agent frame work to study the interaction between the government (principal) and the hospital (agent). The hospital can make effort to reduce the readmission rate (hidden action). The hospital side is modeled using queueing with feedback results. Finally, we evaluate the impact of hospital\u27s efforts on the government\u27s expense and patient welfare

The Debate on Influencing Doctors’ Decisions: Are Drug Characteristics the Missing Link?

Decision-making by physicians on patients’ treatment has come under increased public scrutiny. In fact, there is a fair amount of debate on the effects of marketing actions of pharmaceutical firms toward physicians and their impact on physician prescription behavior. While some scholars find a strong and positive influence of marketing actions, some find only moderate effects, and others even find negative effects. Debate is also mounting on the role of other influencers (such as patient requests) in physician decision-making, both on prescriptions and sample-dispensing. The authors argue that one factor that may tip the balance in this debate is the role of drug characteristics, such as a drug’s effectiveness and a drug’s side effects. Using a unique data set, they show that marketing efforts – operationalized as detailing and symposium meetings of firms to physicians – and patient requests do affect physician decision-making differentially across brands. Moreover they find that the responsiveness of physicians’ decision-making to marketing efforts and patient requests depends upon the drug’s effectiveness and side effects. The paper presents clear guidelines for public policy and managerial practice and envisions that the study of the role of drug characteristics – such as effectiveness and side effects – may lead to valuable insights in this surging public debate

Are Consumers Affected by Durable Goods Makers' Financial Distress? The Case of Auto Manufacturers

The financial decisions of durable goods makers can impose spillovers on their consumers. Namely, durable goods provide a consumption stream that frequently depends on services provided by the manufacturer (e.g., warranties, parts, and maintenance). Manufacturer bankruptcy, or even the possibility thereof, threatens this service provision and can substantially reduce the value of its products to their current owners. We test this hypothesis in one of the largest durable goods markets, automobiles, using data on millions of used cars sold at wholesale auctions around the U.S. during 2006-8. We find that an increase in an auto manufacturer’s financial distress results in a contemporaneous drop in the prices of its cars at auction, controlling for a host of other influences on price. The estimated effects are statistically and economically significant. Furthermore, cars with longer expected service lives (those within manufacturer warranty, having lower mileage, or in better condition) see larger price declines than those with shorter remaining lives. These patterns do not seem to be driven solely by reduced demand from auto dealers affiliated with the troubled manufacturers or by contemporaneous declines in new car prices. Our estimates imply a potentially large indirect cost of financial distress on car manufacturers.

The relationship between DTCA, drug requests, and prescriptions: Uncovering variation in specialty and space

textabstractPatients increasingly request their physicians to prescribe specific brands of pharmaceutical drugs. A popular belief is that requests are triggered by direct-to-consumer advertising (DTCA). We examine the relationship between DTCA, patient requests, and prescriptions for statins. We find that although the effect of requests on prescriptions is significantly positive, the mean effect of DTCA on patient requests is negative, yet very small. More interestingly, both effects show substantial heterogeneity across physicians, which we uncover using a hierarchical Bayes estimation procedure. We find that specialists receive more requests than primary care physicians but translate them less into prescriptions. In addition, we find that the sociodemographic profile of the area a physician practices in moderates the effects of DTCA on requests and of requests on prescriptions. For instance, physicians from areas with a higher proportion of minorities (i.e., blacks and Hispanics) receive more requests that are less triggered by DTCA and are accomodated less frequently than physicians from areas with a lower proportion of minorities. Our results challenge managers to revisit the role of DTCA in stimulating patient requests. At the same time, they may trigger public policy concerns regarding physicians' accommodation of patient requests and the inequalities they may induce