Advertising strategy in the presence of reviews: an empirical analysis

Co-authors: Brett Hollenbeck, Davide Proserpio

Marketing Science, forthcoming.

We study the relationship between online reviews and advertising spending in the hotel

industry. Combining a dataset of TripAdvisor reviews with other datasets describing these

hotels’ advertising expenditures, we show, first, that online ratings have a causal demand-side

effect on ad spending. Second, this effect is negative: hotels with higher ratings spend less

on advertising than hotels with lower ratings. This suggests that hotels treat TripAdvisor

ratings and advertising spending as substitutes, not complements. Third, the relationship is

stronger for independent hotels than for chains, and stronger in less differentiated markets

than in more differentiated markets. The former suggests that a strong brand name continues

to provide some immunity to reviews and the latter that the advertising response is stronger

when ratings are more likely to be pivotal. Finally, we show that the relationship between

online ratings and advertising has strengthened over time, just as TripAdvisor has become

more popular, implying that firms respond to online reviews if and only if consumers respond

to them.

Sharing economy: Review of current research and future directions

Co-authors: Chakravarthi Narasimhan, Purushottam Papatla, Baojun Jiang, Praveen K. Kopalle, Paul R. Messinger, Davide Proserpio, Upender Subramanian, Chunhua Wu, Ting Zhu

Customer Needs and Solutions, 5 (March 2018): 93-106.

The sharing economy, in which ordinary consumers also act as sellers, is attracting much interest from scholars and practitioners. The rapid growth of this sector of the economy and the emergence of several large brands like Uber and Airbnb raise several interesting questions that need to be researched. We therefore review and summarize the extant research on this sector and suggest several additional directions for future research.

Selling your product through competitors’ outlets: channel strategy when consumers comparison shop

Co-authors: Yongmin Chen, Shervin Shahrokhi Tehrani

Marketing Science, 37 (January-February 2018): 138-152.

This paper develops a new rationale for decentralization in distribution channels: providing a one-stop comparison shopping experience for consumers. In our duopoly model, when consumers are knowledgeable about their brand preferences, each manufacturer would distribute through vertically-integrated retail outlets only. When some consumers are unsure about their brand preferences, however, it may be optimal for one of the manufacturers to also distribute through its competitor's outlets. The resulting equilibrium has several interesting properties. First, only one of the manufacturers chooses to add competitor-outlet distribution, not both---even when the manufacturers are symmetric. Second, the manufacturer distributing through its competitor's outlets also distributes through its own outlets, i.e., its distribution strategy is a hybrid strategy, combining vertical integration and decentralization. Third, when the manufacturers' brands are asymmetric, it is the weaker brand that has a stronger incentive to pursue hybrid distribution. Fourth, the competitor's outlets in question welcome the new brand, even when no consumer would actually buy the new brand---a case of pure showrooming. These results highlight the linkages between distribution strategy, shopping efficiency, and retail formats. Shopping costs and consumers' uncertainty about their own brand preferences create a demand for multi-brand retailing, and in pursuing this demand, manufacturers may eschew the efficiency advantages of vertical integration in favor of a hybrid distribution strategy. However, the fact that only one of the manufacturers chooses to do so suggests that this strategy also has weaknesses, which we discuss in the paper.

Advertiser prominence effects in search advertising

Co-author: Przemek Jeziorski

Management Science, 64 (March 2018): 1365-1383.

Search advertising is the ordered list of advertisements that appears when a user searches in an online search engine. By construction, these ads differ in prominence: ads higher up the list are more prominent than ads lower down the list. However, search ads also differ in prominence in another way: prominence of advertiser. This paper examines how these two types of prominence interact in determining the click-through-rate of search ads. Using individual-level click-stream data from Microsoft's Live Search platform, and measures of advertiser prominence from Alexa.com, we find that ad position and advertiser prominence are substitutes. Specifically, in searches for camera brands, a retailer not in the Top-100 of Alexa rankings has a 30-50% higher click-through-rate (CTR) in position one than in position two, whereas a retailer in the Top-100 of Alexa rankings has only a 0-13% higher CTR for the same position improvement. Qualitatively similar results are obtained for several other search strings. These findings demonstrate, first, that advertiser brand matters even for search ads, and, second, the way it matters, is the opposite of what is usually assumed in the theoretical literature on search advertising.

Measuring and understanding brand value in a dynamic model of brand management

Co-authors: Ron Borkovsky, Avi Goldfarb, and Avery Haviv

Marketing Science, 36 (July-August 2017): 471-499. 

We develop a structural model of brand management to estimate the value of a brand to a firm. In our framework, a brand's value is the expected net present value of future cash flows accruing to a firm due to its brand; our brand value measure recognizes that a firm can change its brand equity by investing in advertising. We estimate quarterly brand values in the stacked chips category for the period 2001-2006, and explore how those values change over time. Comparing our brand value measure to its static counterpart, we find that a static measure, which ignores advertising and its ability to affect brand equity dynamics, yields brand values that are artificially high and that fluctuate too much over time. We also explore how changing the ability to build and sustain brand equity affects brand value. At our estimated parameterization, when brand equity depreciates more slowly, or when advertising becomes more effective at building brand equity, brand value increases. However, counterintuitively, we find that when the effectiveness of advertising is sufficiently high, increasing the rate at which brand equity depreciates increases the value of a firm's brand, even as it reduces the value of the firm overall.

Can brand extension signal product quality?

Marketing Science, 31.5 (2012): 756--770.

This paper asks whether brand extension can serve as a signal of product quality given that it costs less than a new brand. (Existing literature has assumed either that brand extension is cost-neutral or that it costs more.) I show that it can as a perfect Bayesian equilibrium, but the argument is unconvincing. For one thing, the separating equilibrium is not unique; a pooling equilibrium also exists in which brand extension signals nothing. For another, the separating equilibrium relies on off-equilibrium beliefs that are poorly motivated in the model. I propose a refinement of the perfect Bayesian equilibrium that resolves both issues. Empirical off-equilibrium beliefs require that consumers' off-equilibrium beliefs be justifiable on the basis of their prior beliefs and product performance observations. With empirical off-equilibrium beliefs, two necessary conditions for brand extension to signal product quality are identified: (i) consumers must perceive old and new products of the firm to be positively correlated in quality, and (ii) at least some consumers must identify with brands and not the firm behind the brands. Even with these conditions in place, the signaling argument is fragile: firm observability of past performance diminishes brand extension's signaling capability; an arbitrarily small probability of failure for good products eliminates it. My results suggest that, going forward, the case for brand extension must rest on foundations other than signaling product quality.

Marketing and politics: models, behavior, and policy implications

Co-authors: B. R. Gordon, M. Lovett, R. Shachar, K. Arceneaux, M. Peress, A. Rao, S. Sen, D. Soberman, and O. Urminsky

Marketing Letters, 23.2 (2012): 391-403.

The American presidential election is one of the largest, most expensive, and most comprehensive marketing efforts. Despite this fact, marketing scholars have largely ignored this campaign, as well as thousands of others for congresspersons, senators, and governors. This article describes the growth of interest in research issues related to political marketing. This emerging research area lies at the crossroads of marketing and political science, but these fields have developed largely independent of one another with little cross-fertilization of ideas. We discuss recent theoretical, empirical, and behavioral work on political campaigns, integrating perspectives from marketing and political science. Our focus is on (1) the extent to which paradigms used in goods and services marketing carry over to the institutional setting of political campaigns, (2) what changes are necessary in models and methodology to understand issues in political marketing and voter behavior, and (3) how the special setting of politics may help us gain a better understanding of certain topics central to marketing such as advertising, branding, and social networks.