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Promotional Chat on the Internet

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  • Dina Mayzlin

    ()
    (Yale School of Management, 135 Prospect Street, New Haven, Connecticut 06520)

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    Abstract

    Chat rooms, recommendation sites, and customer review sections allow consumers to overcome geographic boundaries and to communicate based on mutual interests. However, marketers also have incentives to supply promotional chat or reviews in order to influence the consumers' evaluation of their products. Moreover, firms can disguise their promotion as consumer recommendations due to the anonymity afforded by online communities. We explore this new setting where advertising and word of mouth become perfect substitutes because they appear indistinguishable to the consumer. Specifically, we investigate here whether word of mouth remains credible and whether firms choose to devote more resources promoting their inferior or superior products. We develop a game theoretic model in which two products are differentiated in their value to the consumer. Unlike the firms, the consumers are uncertain about the products' quality. The consumers read messages online that help them decide on the identity of the superior product. We find a unique equilibrium where online word of mouth is persuasive despite the promotional chat activity by competing firms. In this equilibrium, firms spend more resources promoting inferior products, in striking contrast to existing advertising literature. In addition, we discuss consumer welfare implications and how other marketing strategies might interact with promotional chat.

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    File URL: http://dx.doi.org/10.1287/mksc.1050.0137
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 25 (2006)
    Issue (Month): 2 (03-04)
    Pages: 155-163

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    Handle: RePEc:inm:ormksc:v:25:y:2006:i:2:p:155-163

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    Related research

    Keywords: advertising; word-of-mouth; source credibility; Internet marketing;

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    Cited by:
    1. Richards, Timothy J. & Tiwari, Ashutosh, 2014. "Social Networks and Restaurant Choice," 2014 AAEA/EAAE/CAES Joint Symposium: Social Networks, Social Media and the Economics of Food, May 29-30, 2014, Montreal, Canada 166112, Agricultural and Applied Economics Association & Canadian Agricultural Economics Society & European Association of Agricultural Economists.
    2. Maria Arbatskaya & Hideo Konishi, 2013. "Consumer Referrals," Emory Economics 1310, Department of Economics, Emory University (Atlanta).
    3. Mangold, W. Glynn & Faulds, David J., 2009. "Social media: The new hybrid element of the promotion mix," Business Horizons, Elsevier, vol. 52(4), pages 357-365, July.
    4. Sarigul, Sercan & Rui, Huaxia, 2014. "Nowcasting Obesity in the U.S. Using Google Search Volume Data," 2014 AAEA/EAAE/CAES Joint Symposium: Social Networks, Social Media and the Economics of Food, May 29-30, 2014, Montreal, Canada 166113, Agricultural and Applied Economics Association & Canadian Agricultural Economics Society & European Association of Agricultural Economists.
    5. Rohit Aggarwal & Ram Gopal & Ramesh Sankaranarayanan, 2007. "Negative Blogs, Positive Outcomes: When should Firms Permit Employees to Blog Honestly?," Working Papers 07-32, NET Institute, revised Sep 2007.
    6. Nagler, Matthew G. & Kronenberg, Fredi & Kennelly, Edward J. & Jiang, Bei & Ma, Chunhui, 2010. "The use of indicators for unobservable product qualities: inferences based on consumer sorting," MPRA Paper 28409, University Library of Munich, Germany.
    7. Reuber, A. Rebecca & Fischer, Eileen, 2011. "International entrepreneurship in internet-enabled markets," Journal of Business Venturing, Elsevier, vol. 26(6), pages 660-679.
    8. Weijia Dai & Ginger Z. Jin & Jungmin Lee & Michael Luca, 2012. "Optimal Aggregation of Consumer Ratings: An Application to Yelp.com," NBER Working Papers 18567, National Bureau of Economic Research, Inc.
    9. Edgardo Arturo Ayala Gaytán, 2009. "Social network externalities and price dispersion in online markets," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(2), pages 1-28, November.
    10. Maria Arbatskaya & Hideo Konishi, 2013. "Consumer Referrals," Boston College Working Papers in Economics 851, Boston College Department of Economics.
    11. Yabing Jiang & Hong Guo, 2012. "Design of Consumer Review Systems and Product Pricing," Working Papers 12-10, NET Institute.
    12. Galeotti, Andrea & Moraga-González, José Luis, 2008. "Segmentation, advertising and prices," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1106-1119, September.
    13. Bing Jing, 2011. "Seller honesty and product line pricing," Quantitative Marketing and Economics, Springer, vol. 9(4), pages 403-427, December.
    14. Jianqing Chen & Hong Xu & Andrew B. Whinston, 2009. "Moderated Online Communities and User-Generated Content," Working Papers 09-11, NET Institute.
    15. Young Kwark & Jianqing Chen & Srinivasan Raghunathan, 2013. "Platform or Wholesale? Different Implications for Retailers of Online Product," Working Papers 13-14, NET Institute.

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