The Development and Impact of Consumer Word of Mouth in New Product Diffusion

43 Pages Posted: 27 Aug 2009

See all articles by Y. Jackie Luan

Y. Jackie Luan

Independent

Scott Neslin

Dartmouth College - Tuck School of Business

Date Written: August 26, 2009

Abstract

We investigate how consumer word of mouth (WOM) develops over time and in turn influences new product adoption. We develop a dynamic aggregate-level model of WOM development and new product diffusion that explicitly captures consumers’ learning of product quality from both marketing communications and WOM. It allows us to measure how effectively firms’ marketing efforts generate WOM (buzz) and to determine whether WOM influences product adoption primarily through an informative role (i.e., helping the consumer learn product quality) or a persuasive role (i.e., exerting a direct impact on sales, for example, by increasing awareness). A formal treatment of the endogeneity issue inherent in the WOM-sales relationship enables us to infer short-term and long-term sales elasticity of WOM. The model is estimated using simulated generalized method of moments (GMM) and applied to the U.S. video game market.

Our results indicate: (1) media publicity is especially effective at generating WOM for video games while media advertising is ineffective. (2) WOM is the key source of quality learning. It has a larger informative effect than publicity and advertising combined. (3) While WOM also has a significant persuasive effect, the informative effect dominates; therefore, buzz marketing is economically meaningful only for high-quality products.

Keywords: word of mouth, learning models, durable goods diffusion, advertising, publicity, video games

JEL Classification: M31, M37, L82, D80, C51, C33

Suggested Citation

Luan, Ye Jackie and Neslin, Scott, The Development and Impact of Consumer Word of Mouth in New Product Diffusion (August 26, 2009). Tuck School of Business Working Paper No. 2009-65. Available at SSRN: https://ssrn.com/abstract=1462336 or http://dx.doi.org/10.2139/ssrn.1462336

Ye Jackie Luan (Contact Author)

Independent

No Address Available

Scott Neslin

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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