Optimal Promotion and Pricing Strategies in the Presence of Online Customer Ratings in Service Systems

Online ratings and reviews are crucial for customers to choose a service provider, but how do they affect the service quality and the customer satisfaction? This question has been largely overlooked in the literature, especially for service systems that involve queueing and congestion. However, for many companies, particularly startups, it may take too long for ratings to be accumulated by themselves. Therefore, to avoid a cold start, which means having insufficient ratings and reviews to attract customers, many companies carry out various promotional activities to achieve a good initial rating and positive reviews in order to quickly build up reputation and increase visibility. There are quite a lot of studies on examining customer response towards the ratings and reviews and how companies should make a decision on promotion and pricing. These studies mainly focus on the goods market. A key difference between a goods market and a service system is that the congestion level is an important factor affecting customer consumption experience in the latter system and it is a metric endogenously determined by customers’ queueing decisions. In this study, we aim to answer the following questions: Given a service provider's promotion and pricing strategies and rating information, what is the optimal queueing strategy of incoming customers? How does the rating system influence the demand rate and the service quality compared to a system without ratings? How should a service provider optimize its promotion and pricing strategies based on the rating system and the customer behavior? What are the differences in the outcomes between a profit-maximizing and a welfare-maximizing system? These questions are not well addressed in the literature, which motivates our study. Successful completion of the project will help to deepen our understanding on the impact of rating system on the performance of service systems. It will also help service firms to make better promotion and pricing decision and help the social planner to better regulate the online rating systems to protect customers.