Accounting For Profit - Queuing for Expert Services

There's a fine line between profits and profiteering. Some experts - mechanics, lawyers, doctors, etc. - have been known to cross this line, at the cost of their professions' public reputation. Laurens Debo, from the Tepper School of Business at Carnegie-Mellon University, Associate Professor L. Beril Toktay and Professor Luk Van Wassenhove, both from INSEAD's Technology and Operations Management Area, present a model that explores the conditions under which a profit-maximizing expert service provider would be tempted to oversell services and make design suggestions to limit overselling.

by Beril Toktay,Luk Van Wassenhove, Laurens Debo
Last Updated: 23 Jul 2013

Experts with specialist knowledge and skills are sometimes considered with suspicion, especially after the bill has been received. Were all the items billed really necessary? There are enough examples in the courts of over-billing to convince potential customers of the usefulness of the dictum 'caveat emptor'. These experts are perceived, perhaps, as a 'necessary evil', for no one can function without them in a modern society. The authors analyze the optimal strategy for these expert service providers, taking into account market conditions that can lead to excessive service inducement. Based on this, they make design suggestions to limit the incentive to oversell, which would incur negative financial consequences and damage reputation.

Laurens Debo, of the Tepper School of Business at Carnegie-Mellon University, L. Beril Toktay, Associate Professor of Technology and Operations Management at INSEAD, and Luk Van Wassenhove, The Henry Ford Chaired Professor of Manufacturing and Professor of Operations Management at INSEAD, consider a monopolist expert offering a service with a 'credence' characteristic. A credence service is one where the customer cannot verify, even after purchase, whether the amount of prescribed service was appropriate or not: examples include legal, medical or consultancy services and car repair. This creates an incentive for the expert to 'induce service', that is, to provide unnecessary services that add no value to the customer, but that allow the expert to increase his revenues.

The authors focus on the impact of an operations phenomenon on service inducement - workload dynamics due to the random character of inter-arrival and service times. To this end, they model the expert's service operation as a single-server queue. The expert determines the service price within a fixed and variable rate structure and decides whether to induce service or not. They characterize the expert's combined optimal pricing and service inducement strategy as a function of service capacity, potential market size, value of service and waiting cost. The authors conclude with design implications of their results in limiting service inducement. With this work, the authors bridge the gap between stylised models from the economics literature and the literature on service management, which allows them to obtain valuable insights concerning the temptations that experts face in real business settings.

INSEAD 2004

Beril Toktay,Luk Van Wassenhove, Laurens Debo recommends

Click here to read the full article on INSEAD Knowledge

Read more

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today