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Does Advertising Serve as a Signal? Evidence from Field Experiments in Mobile Search

55 Pages Posted: 25 Jan 2016 Last revised: 15 Dec 2016

Navdeep S. Sahni

Stanford Graduate School of Business

Harikesh Nair

Stanford University - Graduate School of Business

Date Written: December 14, 2016

Abstract

In a field experiment, we demonstrate that advertising can serve as a signal that enhances consumers' evaluations of advertised goods. We implement the experiment on a mobile search platform that provides listings and reviews for an archetypal experience good, restaurants. In collaboration with the platform, we randomize about 200,000 users in 13 Asian cities into exposure of ads for about 600 local restaurants. Within the exposure condition, we randomly vary the disclosure to the consumer of whether a restaurant's listing is a paid-ad. This enables isolating the effect on outcomes of a user knowing that a listing is sponsored – a pure signaling effect. We find that this disclosure increases calls to the restaurant by 77%, holding fixed all other attributes of the ad. The disclosure effect is higher when the consumer uses the platform away from his typical city of search, when the uncertainty about restaurant quality is larger, and for restaurants that have received fewer ratings in the past. On the supply side, newer, higher rated and more popular restaurants are found to advertise more on the platform. Taken together, we interpret these results as consistent with a signaling equilibrium in which ads serve as implicit signals that enhance the appeal of the advertised restaurants. Both consumers and firms seem to benefit from the signaling. Consumers shift choices towards restaurants that are better rated (at baseline) in the disclosure condition compared to the no disclosure condition, and advertisers gain from the improved outcomes induced by disclosure. The results also imply that search-platforms would gain from clear sponsorship disclosure, and hold implications for platform design.

Keywords: informative advertising, signaling, field-experiments, restaurants, mobile, paid-search, platforms

Suggested Citation

Sahni, Navdeep S. and Nair, Harikesh, Does Advertising Serve as a Signal? Evidence from Field Experiments in Mobile Search (December 14, 2016). Stanford University Graduate School of Business Research Paper No. 16-10. Available at SSRN: https://ssrn.com/abstract=2721468 or http://dx.doi.org/10.2139/ssrn.2721468

Navdeep S. Sahni (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Harikesh Nair

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-4256 (Phone)

HOME PAGE: http://faculty-gsb.stanford.edu/nair/index.html

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