Signaling Quality to Consumers: The Role of Social Media Marketing

Firms have increasingly turned to social media marketing (SMM) as a means of enhancing their competitive edge and overall performance, yet they vary widely in their SMM spending. Building on an established game-theoretic framework of quality signaling, we consider the dual roles of SMM in (i) increasing product awareness and (ii) informing consumers about product quality (i.e., SMM’s “information revelation” role) in order to analyze a monopolist firm’s pricing decisions and strategic SMM spending. We first study the benchmark case, in which the only role of SMM is to increase product awareness, and then, we analyze the case in which SMM also plays an information revelation role. Our results are in stark contrast to prior results in the literature and yield new managerial insights. We show in particular that—in both the benchmark and information revelation cases—there is no separating equilibrium. Moreover, only two types of equilibria are possible: a partial pooling equilibrium, where only those firms whose products are of low or middle quality pool together and then, choose the same level of SMM spending; or a full pooling equilibrium, where the same SMM spending is chosen by all firms regardless of their respective products’ quality. These results suggest that despite the increased precision of external information (e.g., third-party reviews) available to consumers via SMM, high-quality firms will limit their market size by reducing their SMM spending and thereby, deter lower-quality firms from mimicking them. Finally, we discover that when SMM does serve an information revelation role, high-quality firms find it more difficult to distinguish themselves from lower-quality firms.