The Effects of Herding and Word of Mouth in a Two-Period Advertising Signaling Model

In the context of increasing globalization, a new product may be sequentially released into markets in different countries and regions. The behavior of consumers in the market where a new product is first launched may have a huge impact on the purchasing behavior of consumers in later markets through the effects of herding and word of mouth (WOM). We suggest that these effects may significantly influence advertising when new products with short life cycles, such as movies, books, games, and music, are sequentially launched and not repeatedly purchased by consumers. Using a two-period advertising signaling model, this study theoretically demonstrates that the effects of herding and WOM affect the existence of separating (signaling quality) and pooling (hiding quality information) equilibria, but the number of potential consumers in different markets has no impact. Importantly, we investigate the firm\u27s strategic choices by comparing the profits generated under different equilibria and find that if the strength of WOM or the unit advertising cost increases, or if the herding effect decreases, a pooling equilibrium is likely to be the best, and a win-win, strategy before a new product is first released and consumed; otherwise, a separating equilibrium dominates. We also find that the cost of signaling decreases as WOM increases, whereas it increases with the herding effect or the mass of consumers in Period 1. Our findings provide several managerial implications relating to releasing product quality information for those industries in which products without repeat purchase are sequentially released in different markets

Do I Follow My Friends or the Crowd? Information Cascades in Online Movie Ratings

Online product ratings are widely available on the Internet and are known to influence prospective buyers. An emerging literature has started to look at how ratings are generated and, in particular, how they are influenced by prior ratings. We study the social influence of prior ratings and, in particular, investigate any differential impact of prior ratings by strangers (“crowd”) versus friends. We find evidence of both herding and differentiation behavior in crowd ratings wherein users’ ratings are influenced positively or negatively by prior ratings depending on movie popularity. In contrast, friends’ ratings always induce herding. Further, the presence of social networking reduces the likelihood of herding on prior ratings by the crowd. Finally, we find that an increase in the number of friends who can potentially observe a user’s rating (“audience size”) has a positive impact on ratings. These findings raise questions about the reliability of ratings as unbiased indicators of quality and advocate the need for techniques to debias rating systems

Trade-off Between Two Advertising Strategies: Coverage or Penetration

Advertising has always been an important way for companies to promote their products and carry out product publicity. With the advent of the information age and the convenience of the Internet, the spread and dissemination of advertising are becoming widespread. There are two different basic advertising strategies, namely expanding market coverage and increasing market penetration. Expanding market coverage is a common advertising strategy for company managers. Through this strategy, they focus on the size of the market. Increasing market penetration is another way to increase demand. Company managers focus on the current market, but gain and maintain greater penetration by improving the quality of products or services. The first (coverage) strategy can be seen as distributing flyers, advertising boards and mass acquisitions. The efforts of the second (penetration) strategy can be seen as improving product quality, service environment and positive reputation. Which one is more effective, coverage or penetration? Under what conditions is it better for the company manager? These problems have not been found in the literature. By establishing a two-stage model, this article discusses the optimal advertising levels of these two strategies. Specifically, this article compares the optimal profits of the two strategies in various market environments and finds more effective advertising strategies. Management insights are generated for decision-making of firm managers

Cues or Content? Examining the Moderating Role of Crowdfunder Experience

Crowdfunders face information asymmetry problems when making funding decisions. How crowdfunders overcome this problem has become a centerpiece of crowdfunding research. We examine how crowdfunder experience might affect crowdfunder reliance on various types of information provided on the crowdfunding page. Drawing on the Elaboration Likelihood Model, we find that experienced crowdfunders are more likely to pay attention to the content of the information, whereas less experienced crowdfunders are more likely to pay attention to simple cues. Our study highlights the important role of crowdfunder experience in crowdfunding research. We also discuss the implications of this study for various participants of the crowdfunding platform

Impact of Signals And Signal Generation on Sales Rank on Amazon.com

In eCommerce, information asymmetry between sellers and buyers has greatly increased compared to traditional offline retail due to increased temporal and physical distance. Signal theory suggests that signals play a key role in closing this information gap, building consumer trust, and increasing purchasing intent. This paper analyzes how different signals on Amazon.com, the largest eCommerce platform in the United States, impact sales rank through a panel regression analysis of 30 days of data in the Lip Scrub category. This study finds that Amazon.com-generated signals are more impactful than user-generated or sponsored signals and that sponsored product recommendations are not as effective as other studied signals, even though sellers pay to be sponsored. Future research can dive deeper into these signals and better understand their relationship with sales volume, growing the understanding of how consumers are influenced by information signals

Social Influence Bias in Online Ratings: A Field Experiment

The aim of this paper is to study the empirical phenomenon of rating bubbles, i.e. clustering on extremely positive values in e-commerce platforms and rating web sites. By means of a field experiment that exogenously manipulates prior ratings for a hotel in an important Italian tourism destination, we investigate whether consumers are influenced by prior ratings when evaluating their stay (i.e., social influence bias). Results show that positive social influence exists, and that herd behavior is asymmetric: information on prior positive ratings has a stronger influence on consumers’ rating attitude than information on prior mediocre ratings. Furthermore, we are able to exclude any brag-or-moan effect: the behavior of frequent reviewers, on average, is not statistically different from the behavior of consumers who have never posted ratings online. Yet, non-reviewers exhibit a higher influence to excellent prior ratings, thus lending support to the social influence bias interpretation. Finally, also repeat customers are affected by prior ratings, although to a lesser extent with respect to new customers

The effect of lockup and persuasion on online investment decisions: an experimental study in ICOs

Many firms use social media (SM) to solicit online investments. In this study, we examine the interaction between SM attributes and online-investment attributes to determine how this interaction shapes users’ investment decisions. Specifically, we investigate initial coin offerings (ICOs) as an application domain of distributed ledger technology for peer-to-peer investment. We use signaling theory to develop a context-specific explanation for how the interplay of persuasion signals found in SM and technology-enforced lockups shapes individuals’ ICO investment decisions. To evaluate this interplay, we conducted a 2 × 2 factorial experiment with 473 participants. The results show that when an investment does not require a technology-enforced lockup, persuasion signals encourage investments in ICOs; however, when an investment requires a technology-enforced lockup, persuasion signals do not affect investments in ICOs. Furthermore, our analyses suggest that combining a technology-enforced lockup and persuasion signals reduces the ICO’s plausibility. This is the first study to investigate how the willingness to invest in ICOs is influenced by the relationship between technology-enforced lockups and persuasion signals. The findings have practical implications for individuals attempting to make sound decisions on ICO investments, policymakers regulating online investments, and firms seeking to attract investors

Consumer Herding Behavior in Online Buying: A Literature Review

The purpose of this review paper is to present the application of herding behavior in online buying. The simplest description of herding behavior is the imitation of others in making decisions. Online buying platforms have facilitated observing others' buying behavior, thereby increasing possibilities of social influence on our information search, evaluation, and buying. The concept of herding is multi-disciplinary; however, the literature review on herding behavior is mainly grounded in economics and finance. There is little understanding of herding behavior in marketing literature. Therefore, this study covers herding behavior literature through high-quality research papers published from 2000 to 2020 in journals indexed in the social science citation index, science citation index expanded, and emerging source citation index. This paper discusses the conceptualization of herding in online buying, herding situations, information-processing view of herding, measuring herding effect, herding models and theories, and areas for future research to enrich herding literature in online buying. This paper proposes a herding model (HCMMD) based on the stimulus-organism-response (SOR) theory to study herding behavio

(De)marketing to Manage Consumer Quality Inferences

Savvy consumers attribute a product’s market performance to its intrinsic quality as well as the seller’s marketing push. The authors study how sellers should optimize their marketing decisions in response. They find that a seller can benefit from “demarketing” its product, meaning visibly toning down its marketing efforts. Demarketing lowers expected sales ex ante but improves product quality image ex post, as consumers attribute good sales to superior quality and lackluster sales to insufficient marketing. The authors derive conditions under which demarketing can be a recommendable business strategy. A series of experiments confirm these prediction

HOW DO CONSUMERS USE SOCIAL SHOPPING WEBSITES? THE IMPACT OF SOCIAL ENDORSEMENTS

Social endorsements are user-generated endorsements of products or services, such as “likes” and personal collections, in an online social platform. We examine the effect of prior social endorsements on subsequent users’ tendency to endorse or examine a product in a social shopping context, where a social platform connect consumers and enable a collaborative shopping experience. This research consists of two parts. In part I, we identify two ways prior social endorsements can affect subsequent user behavior: as a crowd endorsement, which is an aggregate number of endorsements a product receives for anyone who comes across the product, and as a friend endorsement, which is an endorsement with the endorser’s identity delivered only to the endorser’s friends or followers. Using a panel data of 1656 products on a leading social shopping platform, we quantify the relationship between crowd and friend endorsements and subsequent examination (“click”) and endorsement (“like”) of the products, noting that examination is a private behavior while endorsement is a public behavior. Our results are consistent with the identity signaling theory where identity-conscious consumers converge with the aspiration group (the followers) in their public behavior (e.g. endorsement) and diverge from the avoidance groups (the crowd). We also find differences between public and private behaviors. Moreover, the symbolic nature of social shopping platform trumps the traditional dichotomy of symbolic/functional product attributes. Part II of this study seeks to clarify the underlying mechanism through lab experiments. We hypothesize that consumers’ evaluative attitude, specifically the value-expressive type, moderates the relationship between crowd and friend endorsements and a focal user’s product choice. Our initial results of the second study show support for this idea in the cases when the product choice is not obvious