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Managing Service Systems in the Presence of Social Networks

We study the optimal service differentiation policy for service organizations in the presence of social networks. In our framework, customers' beliefs of the service quality evolve over time according to their own experiences and the reported experiences from their friends in the network. We characterize the conditions under which such belief system converges and the corresponding optimal service differentiation policy. Our main results can be summarized as follows: First, contrary to the existing literature, we show that, when customers directly report their experiences, the importance of a customer only depends on her marginal economic value, her influence on her friends, and her friends' marginal economic values. In other words, the optimal policy only needs first-order friendship information instead of the whole network structure. Second, we demonstrate that the value of knowing the social network structure critically depends on the correlation between customers' economic and social values. The social network value is higher if the correlation is lower. Third, we use a novel data set with more than 1,600 service providers to show empirically that for many service providers, there are negative correlations between the economic and social values of their customers. We also provide empirical evidence to show that the price ranges of services affect their correlations, with service providers targeting high-end markets having more negative correlations.