  Advancements in service sector and growing online platforms are intensifying
the information exchange between customers through (electronic) word-of-mouth
(WoM). The information obtained by WoM has shown to be a dominant factor in
customers' purchase decisions creating an endogenous demand structure. Service
providers can monitor how their service is perceived by consumers through
different methods, for example surveys. Although this requires an additional
effort, the understanding and integration of endogenous demand into operational
decisions offer great benefits. In this paper, we study a service system where
customers are sensitive to the on-demand access to the service. Customers form
a perception based on the information obtained by WoM communication and the
advertisement. Depending on the type of the service environment, service
capacity can be flexible or constant. We consider two types of service
providers: aware firm that has complete information on endogenous demand
structure, and na\"ive firm that has partial information. Our focus is to
understand the optimal advertisement and capacity decisions, and the value of
information on the underlying demand. For firms that have flexible service
capacity, we show that it is optimal to employ aggressive advertisement
strategies in the early stages. Myopic naive firms often misinterpret the
market conditions and cease operating, where they could in fact realize profit.
For the cases where the capacity is not flexible, it may not be possible to
avoid negative WoM. Therefore, the service provider is forced to keep the level
of advertisements more compatible with the actual quality of the service. This
prevents the firm from overcrowding the system through advertisement without
considering the service quality.
