Managing Service Systems in the Presence of Social Networks

27 Pages Posted: 14 Oct 2015 Last revised: 24 Jan 2018

Gad Allon

Northwestern University - Kellogg School of Management

Dennis Zhang

Washington University in St. Louis - John M. Olin Business School

Date Written: May 4, 2017

Abstract

We study the optimal service-level differentiation for service organizations whose customers engage in communication through social networks. In our setting, customers learn about service quality from both their experience and the experiences of others as reported through their social networks. We characterize a firm's optimal service differentiation policy in such settings. We then study the value of knowing the structure of the social network. We demonstrate that the value of knowing the social network structure critically depends on the correlation between customers' economic value and their social influence. The social network value is higher if the correlation is lower. We then use a novel dataset with more than 6,000 service providers across 11 cities to empirically show that many service providers face negative correlations and can benefit significantly from obtaining information on how their customers engage in social networks. Furthermore, we empirically demonstrate that a service provider's price range is an important indicator of how their customers' economic value and social influence correlate, with service providers who target high-end markets having more negative correlations.

Keywords: Social Network, Service Operations, Learning

JEL Classification: D12, D83, D86

Suggested Citation

Allon, Gad and Zhang, Dennis, Managing Service Systems in the Presence of Social Networks (May 4, 2017). Available at SSRN: https://ssrn.com/abstract=2673137 or http://dx.doi.org/10.2139/ssrn.2673137

Gad Allon

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Dennis Zhang (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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