Production in a Service Industry Using Customer Inputs: A Stochastic Model

The hypothesis that service industry production is a cooperative effort using inputs supplied by firms and customers is investigated. Customer time is seen as a Hicks neutral input which uniformly increases the marginal productivity of all other factors. Simple queuing theory is used to develop the competitive market implications. A stochastic model is used to test the following hypotheses using data from the dental industry: 1. Customer time has a positive marginal product. 2. Firms employ the profit-maximizing level of customer time. Results support both hypotheses.