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Setting Quality Expectations When Entering a Market: What Should the Promise Be?

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  • Praveen K. Kopalle

    () (Tuck School of Business, Dartmouth College, Hanover, New Hampshire 03755)

  • Donald R. Lehmann

    () (Graduate School of Business, Columbia University, New York, New York 10027)

Abstract

This paper examines optimal advertised quality, actual quality, and price for a firm entering a market. It develops a two-period model where advertised quality influences expectations, and hence trial and the gap between actual quality and expectations determines satisfaction, which in turn impacts second-period sales. In such situations a company makes a choice between advertising high quality and getting trial, but little repeat; and advertising low quality and getting low trial, but high repeat. Results are derived by numerical methods, as well as analytically for a special case of the model. The model suggests it is optimal to overstate quality when (i) customers rely relatively less on advertising to form quality expectations, and (ii) customers' intrinsic satisfaction with a product is high. These results are consistent with deceptive advertising cases at the FTC, which showed more deception for unknown firms and for firms whose customers were more satisfied. They are also consistent with the decisions made by future managers (MBAs), except that the respondents would advertise higher (versus lower) quality when advertising was effective.

Suggested Citation

  • Praveen K. Kopalle & Donald R. Lehmann, 2006. "Setting Quality Expectations When Entering a Market: What Should the Promise Be?," Marketing Science, INFORMS, vol. 25(1), pages 8-24, 01-02.
  • Handle: RePEc:inm:ormksc:v:25:y:2006:i:1:p:8-24
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    File URL: http://dx.doi.org/10.1287/mksc.1050.0122
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    References listed on IDEAS

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    1. Mahmut Sonmez & Deli Yang & Gerald Fryxell, 2013. "Interactive Role of Consumer Discrimination and Branding against Counterfeiting: A Study of Multinational Managers’ Perception of Global Brands in China," Journal of Business Ethics, Springer, vol. 115(1), pages 195-211, June.
    2. Ajay Kalra & Shibo Li, 2008. "Signaling Quality Through Specialization," Marketing Science, INFORMS, vol. 27(2), pages 168-184, 03-04.
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    5. Raj Echambadi & James D. Hess, 2007. "Mean-Centering Does Not Alleviate Collinearity Problems in Moderated Multiple Regression Models," Marketing Science, INFORMS, vol. 26(3), pages 438-445, 05-06.
    6. Reo Song & Sungha Jang & Gangshu (George) Cai, 2016. "Does advertising indicate product quality? Evidence from prelaunch and postlaunch advertising in the movie industry," Marketing Letters, Springer, vol. 27(4), pages 791-804, December.
    7. M. Billur Akdeniz & Roger J. Calantone, 2017. "A longitudinal examination of the impact of quality perception gap on brand performance in the US Automotive Industry," Marketing Letters, Springer, vol. 28(1), pages 43-57, March.
    8. Xie, Yu Henry & Zhao, Hongxin John & Xie, Qian Jane & Arnold, Mark, 2011. "On the determinants of post-entry strategic positioning of foreign firms in a host market: A "strategy tripod" perspective," International Business Review, Elsevier, vol. 20(4), pages 477-490, August.
    9. Yuanfang Lin & Amit Pazgal, 2016. "Hide Supremacy or Admit Inferiority—Market Entry Strategies in Response to Consumer Informational Needs," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 3(2), pages 94-103, June.
    10. Molina-Castillo, Francisco-Jose & Lopez-Nicolas, Carolina & Soto-Acosta, Pedro, 2012. "Interaction effects of media and message on perceived complexity, risk and trust of innovative products," European Management Journal, Elsevier, vol. 30(6), pages 577-587.
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    17. James G. Maxham, III & Richard G. Netemeyer & Donald R. Lichtenstein, 2008. "The Retail Value Chain: Linking Employee Perceptions to Employee Performance, Customer Evaluations, and Store Performance," Marketing Science, INFORMS, vol. 27(2), pages 147-167, 03-04.
    18. Michael A. Wiles & Shailendra P. Jain & Saurabh Mishra & Charles Lindsey, 2010. "Stock Market Response to Regulatory Reports of Deceptive Advertising: The Moderating Effect of Omission Bias and Firm Reputation," Marketing Science, INFORMS, vol. 29(5), pages 828-845, 09-10.
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    20. Scott Fay & Juliano Laran, 2009. "Implications of Expected Changes in the Seller's Price in Name-Your-Own-Price Auctions," Management Science, INFORMS, vol. 55(11), pages 1783-1796, November.
    21. Amit M. Joshi & Dominique M. Hanssens, 2009. "Movie Advertising and the Stock Market Valuation of Studios: A Case of “Great Expectations?”," Marketing Science, INFORMS, vol. 28(2), pages 239-250, 03-04.

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