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Underpromising and Overdelivering: Strategic Implications of Word of Mouth

40 Pages Posted: 19 Oct 2011 Last revised: 27 Mar 2012

Yogesh V. Joshi

University of Maryland - Department of Marketing

Andres Musalem

Universidad de Chile

Date Written: March 25, 2012

Abstract

We analyze a firm's optimal communication strategy for setting consumer expectations when consumers are uncertain about product quality and word of mouth is prevalent in the market. We derive three main results: [i] Extant signaling theory argues that advertising should be costly for it to be informative of product quality. We show that in the presence of negative word of mouth, even costless advertising can serve as an informative signal for quality. [ii] Conventional wisdom suggests that as the consequences of negative word of mouth become stronger, a firm should become more cautious in setting high consumer expectations, to prevent future disappointment. We show that this need not always be the case: interestingly, when negative word of mouth is prevalent and its consequences become stronger, a firm might become more aggressive in setting high expectations given consumer rationality. [iii] Disconfirmation (defined as a stronger shift in beliefs when experiences are inconsistent with messages) serves as an adequate mechanism for preventing quality misrepresentation by a firm in its communications to consumers. But when markets are characterized by confirmation effects (a tendency to discount experiences inconsistent with messages) and future sales are important, we observe firms might entirely misrepresent their quality.

Keywords: managing expectations, experience goods, word of mouth, disconfirmation, game theory, signaling, behavioral industrial organization

JEL Classification: D8, L15, M3

Suggested Citation

Joshi, Yogesh V. and Musalem, Andres, Underpromising and Overdelivering: Strategic Implications of Word of Mouth (March 25, 2012). Robert H. Smith School Research Paper No. RHS-06-142. Available at SSRN: https://ssrn.com/abstract=1945970 or http://dx.doi.org/10.2139/ssrn.1945970

Yogesh V. Joshi (Contact Author)

University of Maryland - Department of Marketing ( email )

College Park, MD 20742
United States

Andres Musalem

Universidad de Chile ( email )

Republica 701
Santiago
Chile

HOME PAGE: http://www.dii.uchile.cl/~amusalem

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