Performance measurement and joint-production between the customer and the firm: Empirical and analytical perspectives

This thesis consists of two studies exploring the cost and performance measurement implications of customer interaction in service production processes.; The first study in this thesis examines the consequences of altering the customer's cost of interacting with the firm through the use of electronic service distribution channels. Using a sample of retail banking customers observed over an 18-month period at a large U.S. bank, I examine changes in service consumption patterns associated with customer adoption and use of online banking. I hypothesize that online banking lowers the cost per interaction from the customer's perspective and leads to both a substitution effect (transactions shift from "offline" channels to the online channel) and an income effect (customers facing a lower cost of using a service, demand more service). I empirically estimate these two effects and examine how they combine to affect total customer level costs. In addition, I examine the overall performance consequences of this technology by testing how online banking adoption and use affects customer level revenue, profitability, and retention.; The second study examines the relationship between customers' service resource usage decisions and manager's supply of service capacity. I develop a model of a stochastic service production environment and derive an explicit characterization of optimal capacity supply in which the amount of "excess" capacity supplied to act as a buffer against production and demand uncertainty is weighted by the importance of the tradeoff in congestion costs relative to the cost of additional capacity. I then develop and empirically test several hypotheses based on the results of this model using branch level data from a large financial services firm. I argue that local managers making capacity supply decisions face different tradeoffs in congestion versus capacity related costs depending on characteristics of customers in the local markets in which they operate. Empirically I exploit variation in market area characteristics (income levels, competition, and wage rates) to proxy for differences in these tradeoffs. The findings indicate that the relationships between the supply of "buffer" capacity and proxies for service variability and volume vary systematically with these characteristics. The economic significance of these relationships is found to be substantial.