E-Word of Mouth (WoM) on Action: Analysis of Operational Decisions in Online Shopping
Bahar Çavdar
Industrial Engineering Department, METU

Word-of-Mouth (WoM) communication, via online reviews, plays an important role in customers' purchasing decisions. As such, retailers must consider the impact of WoM to manage customer perceptions and future demand. In this study, we consider an online shopping system with both premium and regular customers. Building on the behavioral and Operations Management literature, we model customer preferences based on the perceived service quality indicated by WoM and integrate this into the retailer's operational problem to determine a shipment policy. First, we study the retailer's problem when she has no knowledge of WoM, and only reacts to the changes in demand. We analyze the long-term behavior of customer demand and show that potential market size and customer sensitivity are the key parameters determining this behavior. Then, we build a model to integrate the knowledge of WoM into operational decision making and partially characterize the optimal solution. We show that (i) beating the competition in market may not always benefit the company as it can result in undesired customer switching behavior, (ii) relaxations in operational constraints may hurt profitability due to the associated difficulties of perception management, and (iii) seeking a stationary policy can lead to suboptimal solutions, therefore cyclic policies should also be considered when appropriate. These insights apply to other systems with multiple service types where customer choices depend on the perception of the service qualities.
This is joint work with Nesim Erkip.

Short Bio
Bahar Çavdar is a faculty member in the Industrial Engineering Department of Middle East Technical University. Her primary research interests are in Behavioral Models in Operations Management and Supply Chain Management, and Time-Sensitive Routing Problems. Dr. Çavdar received her Ph.D. in industrial engineering from Georgia Institute of Technology, and her B.S. in industrial engineering with a minor in computer engineering from the Middle East Technical University.

Friday, November 23, 2018 at 4.00 pm in IE03


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