A Dynamic Model of Brand Choice When Price and Advertising Signal Product Quality

36 Pages Posted: 28 Feb 2007

See all articles by Tulin Erdem

Tulin Erdem

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Marketing

Michael P. Keane

Arizona State University (ASU) - Economics Department; University of Technology, Sydney (Visiting July 2006-Present)

Baohong Sun

Carnegie Mellon University - David A. Tepper School of Business

Date Written: January 2007

Abstract

In this paper, we develop a structural model of household behavior in an environment where there is uncertainty about brand attributes, and both prices and advertising signal brand quality. Four quality signaling mechanisms are at work in the model: 1) price signals quality, 2) advertising frequency signals quality, 3) advertising content provides direct (but noisy) information about quality, and 4) use experience provides direct (but noisy) information about quality. We estimate our proposed model using scanner panel data on ketchup. If price is important as a signal of brand quality, then frequent price promotion may have the unintended consequence of reducing brand equity. We use our estimated model to measure the importance of such effects. Our results imply that price is an important quality signaling mechanism, and that frequent price cuts can have significant adverse effects on brand equity. The role of advertising frequency in signaling quality is also significant, but it is less quantitatively important than price.

Keywords: Consumer Choice under Uncertainty, Bayesian Learning, Signaling, Advertising

Suggested Citation

Erdem, Tulin and Keane, Michael P. and Sun, Baohong, A Dynamic Model of Brand Choice When Price and Advertising Signal Product Quality (January 2007). Available at SSRN: https://ssrn.com/abstract=965473 or http://dx.doi.org/10.2139/ssrn.965473

Tulin Erdem (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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New York University (NYU) - Department of Marketing ( email )

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Michael P. Keane

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

University of Technology, Sydney (Visiting July 2006-Present)

PO Box 123 Broadway
NSW 2007
Australia
480-965-1053 (Phone)
480-965-0748 (Fax)

Baohong Sun

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-6903 (Phone)
412-268-7357 (Fax)

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