38 Pages Posted: 12 Mar 2015 Last revised: 20 Jun 2017
Date Written: June 19, 2017
This paper presents empirical evidence that the existence of word-of-mouth induces sellers of high-quality experience goods to make larger advertising expenditures than low-quality sellers. A simple theoretical model predicts that word-of-mouth and advertising expenditures are less responsive to quality when consumers have less flexible beliefs about their expected payoffs from consuming the good. To test these predictions, I use sales and advertising data on 2,185 wide-release movies, and the fact that consumers have more precise information about their expected payoffs from consuming a sequel compared to an original movie. The empirical evidence confirms the theoretical predictions.
Keywords: advertising, quality, movies
JEL Classification: M31, M37
Suggested Citation: Suggested Citation