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Advancements in service sector and growing online platforms are intensifyingthe information exchange between customers through (electronic) word-of-mouth(WoM). The information obtained by WoM has shown to be a dominant factor incustomers' purchase decisions creating an endogenous demand structure. Serviceproviders can monitor how their service is perceived by consumers throughdifferent methods, for example surveys. Although this requires an additionaleffort, the understanding and integration of endogenous demand into operationaldecisions offer great benefits. In this paper, we study a service system wherecustomers are sensitive to the on-demand access to the service. Customers forma perception based on the information obtained by WoM communication and theadvertisement. Depending on the type of the service environment, servicecapacity can be flexible or constant. We consider two types of serviceproviders: aware firm that has complete information on endogenous demandstructure, and na\"ive firm that has partial information. Our focus is tounderstand the optimal advertisement and capacity decisions, and the value ofinformation on the underlying demand. For firms that have flexible servicecapacity, we show that it is optimal to employ aggressive advertisementstrategies in the early stages. Myopic naive firms often misinterpret themarket conditions and cease operating, where they could in fact realize profit.For the cases where the capacity is not flexible, it may not be possible toavoid negative WoM. Therefore, the service provider is forced to keep the levelof advertisements more compatible with the actual quality of the service. Thisprevents the firm from overcrowding the system through advertisement withoutconsidering the service quality.

Managing Word-of-Mouth through Capacity Allocation and Advertisement