Advertising Strategy in the Presence of Reviews
Time: April 6th, 2017 (Thursday) 10:00am -11:30am
Location: Zhifuxuan Conference Room, National School of Development, Peking U.
Speaker: Ying Lei, Assistant Professor of Marketing, Guanghua School of Management, Peking University.
This paper uses a game-theoretic model to analyze how competing firms’ advertising and pricing decisions respond to reviews. By reviews we mean customer reviews of the sort available at websites such as Yelp and TripAdvisor. In our model, price is observable, but quality is not. Reviews provide information about a firm’s quality; absent reviews, consumers believe that both firms have a 50-50 probability of being satisfactory. Advertising in our model directs new consumers to check out the advertiser’s reviews; absent advertising, a firm can’t get any new consumers. We find that advertising may complement reviews in the sense that the better-reviewed firm advertises more, but it may also substitute for reviews in the sense that the worse-reviewed firm advertises more. Which of these outcomes is more likely depends on whether the firm with the better reviews wins the battle for new consumers or the firm with the worse reviews wins the battle for new consumers. That question is settled in favor of the firm with the better reviews when (a) the new market is large relative to the old market, and (b) when both firms have relatively large numbers of satisfied customers. However, if either of those conditions is not satisfied, then the firm with the worse reviews is likely to win the battle for new consumers, and hence more likely to advertise more–a reversal of the usual Nelson dictum. Capacity constraints on the higher quality firm increase the possibility of the latter outcome. In the process of developing these results we show that the possibility of using advertising to disseminate reviews works to undo the “fat-cat” effect a firm with a large number of satisfied customers usually experiences.
Ying Lei has a Ph.D. in Economics from Boston University, an M.A. in Economics from New York University and a B.A. in Economics from Renmin University of China. Her research fields of interest are: Quantitative Marketing, Industrial Organization, Applied Game Theory, and Applied Econometrics. Her research focuses on the Internet economics, including topics on advertising, consumer learning (WOM, online reviews etc.), information economics, platform/technology adoption and mergers.
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