Does Advertising Serve as a Signal? Evidence from Field Experiments in Mobile Search

In a large-scale field experiment, we demonstrate that advertising can serve as a signal that enhances consumers' evaluations of advertised goods. We implement the experiment on a mobile search platform that provides listings and reviews for an archetypal experience good, restaurants. In collaboration with the platform, we randomize more than 200,000 consumers into exposure or no exposure of ads for about 600+ local restaurants. In conditions in which consumers are exposed to advertising, we also randomly vary the disclosure to the consumer of whether a restaurant's listing is an ad. This enables us to isolate the effect on outcomes of a consumer knowing that a listing is sponsored--a pure signaling effect. We find that this disclosure alone increases calls to the restaurant by 77%, holding fixed all other attributes of the ad. This effect is higher when the consumer uses the platform away from his typical city of search, when the uncertainly about restaurant quality is larger, and for restaurants that have received fewer ratings in the past. Further, on the supply side, newer, higher rated and more popular restaurants advertise more on the platform. Taken together, we interpret these results as consistent with a signaling equilibrium in which ads serve as implicit signals that enhance the appeal of the advertised restaurants. Both consumers and firms seem to benefit from the signaling. Consumers shift choices systematically towards restaurants that are better rated (at baseline) in the disclosure condition compared to the no disclosure condition, and advertisers gain from the improved conversion induced by disclosure. Further, our results imply that search-platforms would gain from clear sponsorship disclosure, and thus holds implications for platform design.