A Business Application of the System Dynamics Approach: Word-of-Mouth and Its Effect in an Online Environment

Abstract

In this article, we illustrate the use of system dynamics modeling approach to study a com- plex system: word-of-mouth. Word-of-mouth plays an important role in reducing risk and uncertainty in purchase and consumption. Most of the prior research on word-of-mouth focused on studying either the factors that trigger consumers’ participation (sending or re- ceiving) in word-of-mouth activities or the impact word-of-mouth information has on con- sumers’ buying decisions. The relationship between the two decision processes, however, is recursive and dynamic. Most prior studies have not focused on a recursive relationship. Our objective is to present a system dynamics model for the study of the relationship between the buying decision and the decision to participate in word-of-mouth communic- ation. We also discuss how system dynamics modeling can be used in other complex prob- lems in business such as the creation of a global business.