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

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