# Managing Word-of-Mouth through Capacity Allocation and Advertisement

**Authors:** Asya Dipkaya, Sakine Batun, Bahar Çavdar  
**arXiv:** [2201.04779](https://arxiv.org/abs/2201.04779)  
**Date:** 2022-01-13  
**Summary page:** https://www.summarizepaper.com/en/paper/2201.04779v1/

## Key points

- The rise of the service sector and online platforms has led to an increase in information exchange between customers through electronic word-of-mouth (WoM).
- WoM communication has been shown to be a dominant factor in customers' purchase decisions, creating an endogenous demand structure.
- Service providers must monitor how their services are perceived by consumers through surveys and other methods to stay competitive.
- Integrating this endogenous demand into operational decisions can offer significant benefits.
- In the paper titled "Managing Word-of-Mouth through Capacity Allocation and Advertisement," authors study a service system where customers are sensitive to on-demand access to the service.
- Depending on the type of service environment, capacity can be flexible or constant.
- Two types of service providers are considered: aware firms that have complete information on endogenous demand structure and naive firms that have partial information.
- Optimal advertisement and capacity decisions and the value of information on underlying demand are studied.
- For firms with flexible service capacity, aggressive advertisement strategies in early stages are optimal as they can maximize profits while maintaining high quality services that meet customer expectations.
- Naive firms often misinterpret market conditions and cease operating when they could realize profit if they had more accurate information about the market's underlying demand structure.
- In cases where capacity is not flexible, negative WoM may be unavoidable; therefore it is crucial for service providers to keep advertisement levels compatible with actual quality of service to prevent overcrowding without considering quality.
- Understanding endogenous demand structures is important in making operational decisions for service providers. By monitoring customer perceptions through surveys or other methods, businesses can optimize their advertising strategies and capacity allocation for maximum profitability while maintaining high-quality services that meet customer expectations.

## Summary

The rise of the service sector and online platforms has led to an increase in information exchange between customers through electronic word-of-mouth (WoM). This form of communication has been shown to be a dominant factor in customers' purchase decisions, creating an endogenous demand structure. To stay competitive, service providers must monitor how their services are perceived by consumers through surveys and other methods. Integrating this endogenous demand into operational decisions can offer significant benefits. In this paper titled "Managing Word-of-Mouth through Capacity Allocation and Advertisement," authors Asya Dipkaya, Sakine Batun, and Bahar Çavdar study a service system where customers are sensitive to on-demand access to the service. Customers form perceptions based on WoM communication and advertisements. Depending on the type of service environment, capacity can be flexible or constant. The authors consider two types of service providers: aware firms that have complete information on endogenous demand structure and naive firms that have partial information. The focus is to understand optimal advertisement and capacity decisions and the value of information on underlying demand. For firms with flexible service capacity, aggressive advertisement strategies in early stages are optimal as they can maximize profits while maintaining high quality services that meet customer expectations. Naive firms often misinterpret market conditions and cease operating when they could realize profit if they had more accurate information about the market's underlying demand structure. In cases where capacity is not flexible, negative WoM may be unavoidable; therefore it is crucial for service providers to keep advertisement levels compatible with actual quality of service to prevent overcrowding without considering quality. Overall, this paper highlights the importance of understanding endogenous demand structures in making operational decisions for service providers. By monitoring customer perceptions through surveys or other methods, businesses can optimize their advertising strategies and capacity allocation for maximum profitability while maintaining high-quality services that meet customer expectations.