| By: |
Haiyan Liu (Department of Economics, University of South Florida) |
| Abstract: |
This paper empirically studies how social learning among consumers shapes
?firms' ?optimal strategies of using advertising to signal product quality. I
present an equilibrium model that describes both consumers? and fi?rms'
?learning and decision-making under quality uncertainty. My model allows me to
distinguish between two roles of informative advertising ?reaching consumers
and signaling product quality. I apply the model to the U.S. motion picture
theatrical market where advertising and social learning are two main factors
for a new movie?'s success. The structural estimates imply that movie studios?
signaling advertising only helps to reduce consumers'? uncertainty by less
than 10 percent. Word-of-mouth is a much more efficient learning channel for
consumers, reducing their uncertainty by more than 90 percent. I also ?find
that around 27 percent of advertising spending for movies in my sample is used
for signaling product quality, while 73 percent is used for reaching
consumers. Studios? tendency to advertise more during the pre-release rather
than the post-release weeks is explained to a large extent by the signaling
purpose. |
| Keywords: |
Advertising, Signaling, Social Learning, Information, Motion Picture Industry |
| JEL: |
D22 D82 D83 L15 L82 M37 |
| Date: |
2016–02 |
| URL: |
http://d.repec.org/n?u=RePEc:usf:wpaper:0216&r=cul |