Does Word of Mouth Reduce Advertising That Signals Quality?

44 Pages Posted: 24 Feb 2013 Last revised: 4 Oct 2018

See all articles by Yogesh V. Joshi

Yogesh V. Joshi

University of Maryland - Department of Marketing

Andres Musalem

Universidad de Chile

Date Written: September 30, 2018

Abstract

Firms invest significantly in advertising with the intent of influencing consumers favorably towards their goods. Along with advertising, word of mouth also plays an important role in shaping consumer opinion about a firm's goods. In many contexts, word of mouth is affected by behaviors such as under-reporting (not everyone shares experiences), positivity (positive experiences communicated more widely than negative ones) or negativity (negative experiences communicated more widely than positive ones). This research analyzes the impact of such word of mouth behaviors on a firm's advertising strategies by asking: should a firm advertise more or less aggressively in the presence of word of mouth, and how should its strategy change in response to above word of mouth behaviors? There are four main insights: (i) compared to its absence, existence of word of mouth can make a firm more aggressive with advertising; (ii) as under-reporting increases, a firm may be better served by reducing advertising; some- times significantly; (iii) as positivity in word of mouth increases, it may be optimal to respond aggressively by increasing advertising; and (iv) as negativity in word of mouth increases, it may still be optimal to respond aggressively by increasing advertising, rather than decreasing it.

Keywords: experience goods, advertising, word of mouth, negativity, positivity, game theory, signaling, behavioral industrial organization

JEL Classification: D8, L15, M3

Suggested Citation

Joshi, Yogesh V. and Musalem, Andres, Does Word of Mouth Reduce Advertising That Signals Quality? (September 30, 2018). Robert H. Smith School Research Paper No. RHS-06-150. Available at SSRN: https://ssrn.com/abstract=2222849 or http://dx.doi.org/10.2139/ssrn.2222849

Yogesh V. Joshi (Contact Author)

University of Maryland - Department of Marketing ( email )

College Park, MD 20742
United States

Andres Musalem

Universidad de Chile ( email )

Beauchef 851
Santiago
Chile

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

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