Word-of-Mouth, Quality, and Advertising: Evidence from Movie Sales

38 Pages Posted: 12 Mar 2015 Last revised: 20 Jun 2017

Ryan Lampe

California State University, East Bay - Department of Economics

Date Written: June 19, 2017

Abstract

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

Lampe, Ryan, Word-of-Mouth, Quality, and Advertising: Evidence from Movie Sales (June 19, 2017). Available at SSRN: https://ssrn.com/abstract=2576550 or http://dx.doi.org/10.2139/ssrn.2576550

Ryan Lampe (Contact Author)

California State University, East Bay - Department of Economics ( email )

25800 Carlos Bee Blvd.
Hayward, CA 94542
United States

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