Contracting in Medical Equipment Maintenance Services: An Empirical Investigation

32 Pages Posted: 11 Sep 2014  

Tian Chan

Emory University - Goizueta Business School

Francis deVericourt

ESMT European School of Management and Technology

Omar Besbes

Columbia Business School - Decision Risk and Operations

Date Written: September 10, 2014

Abstract

Equipment manufacturers offer different types of maintenance service plans (MSPs) that delineate payment structures between equipment operators and maintenance service providers. These MSPs allocate risks differently and thus induce different kinds of incentives. A fundamental question, therefore, is how such structures impact service performance and the service chain value. We answer empirically this question. Our study is based on a unique panel data covering the sales and service records of over 700 diagnostic medical body scanners. By exploiting the presence of a standard warranty period, we overcome the key challenge of isolating the incentive effects of MSPs on service performance from the confounding effects of adverse selection. We found that moving an operator from a basic pay-per-service plan to a fixed-fee full-protection plan leads to both a reduction in reliability and an increase in service costs. We further show that the increase in cost is driven by both the operator and the service provider. Our results point to the presence of losses in service chain value in the maintenance of medical equipment, and provide the first evidence that a basic pay-per-service plan, where the risk of equipment failure is borne by the operator, can actually improve performance and costs.

Keywords: Maintenance repair, service contracting, co-production, empirical operations management, service chain value, healthcare industry

Suggested Citation

Chan, Tian and deVericourt, Francis and Besbes, Omar, Contracting in Medical Equipment Maintenance Services: An Empirical Investigation (September 10, 2014). ESMT Working Paper No. 14-05. Available at SSRN: https://ssrn.com/abstract=2494265 or http://dx.doi.org/10.2139/ssrn.2494265

Tian Chan

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Francis DeVericourt (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany

Omar Besbes

Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

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