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Economics & Business Divsion, SUNY Oneonta, 224 Netzer Administration Building, Oneonta, NY 13820, USA
School of Business Administration, University of WisconsinMilwaukee 3202 N. Maryland Avenue, Milwaukee, WI 53211, USA
Available online 5 February 2011
Abstract
Word of mouth by consumers is attracting increased attention from marketing scholars because of findings that it can affect brand perceptions
and sales. There is limited empirical research, however, on the stimulants of consumer word of mouth. An assumption in the literature has been
that increased advertising can also stimulate consumer word of mouth and, hence, complement the effects of advertising. We present arguments
for why increased advertising may be associated with reductions in online word of mouth. We empirically test this possibility on online word of
mouth in the auto industry. Our results suggest that increased advertising can, indeed, be associated with reductions in online consumer word of
mouth.
2011 Direct Marketing Educational Foundation, Inc. Published by Elsevier Inc. All rights reserved.
Keywords: Word of mouth; Online WOM; Online consumer reviews; Online ratings; Advertising; Automobiles
Introduction
Word of mouth is generally defined as informal communication among consumers about products and services (Liu
2006). It can range from casual inter-personal conversations to
consumer brand advocacy (Keller 2007; Park and MacInnis
2006) where a consumer actively promotes the brand to other
potential consumers. Today, however, word of mouth is also
electronic and can happen in many ways such as Web-based
opinion platforms, discussion forums, boycott Web sites, news
groups (Hennig-Thurau et al. 2004) or consumer-opinion
platforms (Hennig-Thurau et al. 2004). This online word of
mouth (Hennig-Thurau et al. 2004) is thus any positive or
negative statement made by potential, actual, or former
customers about a product or company, which is made available
to a multitude of people and institutions via the Internet (p 39).
Regardless of what form it takes, however, the marketing
literature suggests that word of mouth can play a significant role
in influencing consumers' purchase behavior (Arndt 1967;
Corresponding author.
E-mail addresses: fengj@oneonta.edu (J. Feng), papatla@uwm.edu
(P. Papatla).
1094-9968/$ - see front matter 2011 Direct Marketing Educational Foundation, Inc. Published by Elsevier Inc. All rights reserved.
doi:10.1016/j.intmar.2010.11.002
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77
We would like to thank the Editor, Venky Shankar, for suggesting this.
78
new the product is. One issue that we face in including both
advertising and sales as predictors in our model of word of
mouth, however, is the potential effect of advertising on sales.
The likely effect of advertising on sales means that we cannot
include both as exogenous predictors in our model for word of
mouth. Further precluding the possibility of including both
variables is the likely reverse-causal, and endogenous,
relationship (Lambin 1976; Schmalensee 1972) between
advertising and sales where sales may affect the amount of
advertising manufacturers devote to brands. In order to reliably
investigate the effect of sales and advertising on word of
mouth, therefore, we also need to simultaneously account for
the relationship between sales and advertising and advertising
and sales 7 and therefore use a simultaneous equations
approach.
We therefore specify our word of mouth model with the two
key variables of interest, i.e., advertising and sales, as
independent variables and include customer satisfaction and
the square of customer satisfaction and newness as additional
exogenous variables in the model. Additionally, to allow for the
possibility that the volume of consumer word of mouth differs
across different model years, we include dummy variables to
represent each year for which we have data. We also include the
number of models offered by a brand during each year.
Sales are specified as a function of advertising as well as
consumer word of mouth, the two product attribute variables
(price and mileage per gallon) and the expert opinion variable
from the www.edmunds.com website for our analysis of the
word of mouth data from that site. We do not include the
number of models offered by a brand during each year in this
equation because of high correlation between the number of
models and word of mouth. Finally, we include four dummy
variables.
The advertising model is specified such that advertising is a
function of word of mouth, sales, newness, expert opinions and
price. Our rationale in specifying the advertising equation as
such is that, to the extent that they are endogenous, advertising
decisions are affected not only by sales and word of mouth but
also by how new the product being advertised is and by expert
opinions since strong endorsements by experts may lead to
reductions in advertising spending and vice versa.8 We also
include price as an explanatory variable with the assumption
that more expensive models may be advertised more and vice
versa. Finally, we include dummy variables and the number of
models offered by a brand during each year. The system of three
models is formally specified below.
WOMit = 0 + 1 :ADVit + 2 :SALESit + 3 :CSit + 4 : CSit
+
5 :NEWit
6 :NUMit
2
+ 7 :YEARX2002 + 8 :YEARX2003
+ 9 :YEARX2004 + 10 :YEARX2005 + ti
Model
As discussed above, the volume of consumer word of mouth
for a product is affected not only by advertising for the product
but also by its sales, the satisfaction of its customers and how
7
We would like to thank the Editor, Venky Shankar, for suggesting this
approach.
8
We would like to thank the Editor, Venky Shankar, for suggesting this.
5 :EDGOODti
6 :NUMit
+ 7 :YEARX2002 + 8 :YEARX2003
+ 9 :YEARX2004 + 10 :YEARX2005 + ti :
where
WOMit = word of mouth for brand i in year t
ADVit = Advertising for brand i in year t
SALESit = Sales of brand i in year t
CSit = Customer satisfaction level for brand i in year t
NEWit = Number of new models introduced by brand i in year t
YEAR_ NUMB = Year dummy for year NUMB; NUMB =2002,
2003, 2004, 2005
NUMit = Number of models offered by brand i in year t
EDGOODit = Number of models of brand i in year t endorsed by
Edmunds Experts as Editor Most Wanted
MPGit = Median miles per gallon for all models of brand i in
year t
PRICEit = Median Manufacturer Suggested Retail Price across all
models of brand i in year t
We discuss the operationalization of each of the above
variables in detail below.
Advertising
We collected data on annual advertising spending by
different brands during the 2001 to 2005 model years from
the online site of Automotive News magazine (www.autonews.
com). This data, however, is at the parent brand level for
instance Honda rather than at the level of specific models
such as the Honda Accord. It includes the total annual
advertising spending by each of 32 brands of cars. Since this
data is at the brand-level, our analysis is also at the level of
brands and not specific models. We label this variable as ADV.
Volume of Online Word of Mouth
We collected data on online word of mouth from two online
sites widely used by consumers for information on, and
discussion of, automobiles: www.edmunds.com and www.
consumerreports.org. We chose www.edmunds.com because it
is used by many consumers for information on cars (Ratchford,
Lee, and Talukdar 2003). Consumers who wish to post reviews
at www.edmunds.com go through the following steps. First,
they choose the specific car, in terms of year, make and model,
which they wish to review. They can then rate the car on ride
and design using a 110 scale. They can then go on to provide
the title of their review. Finally, they can write detailed reviews
such as their driving and ownership experience with the vehicle,
their favorite features and suggested improvements to the
model. The site therefore provides the opportunity for visitors to
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80
Table 3
Correlation matrix of variables in the data.
Variables
Measures
Sources
Thousands
US dollars
Number
www.autonews.com
Percentage
US dollars
Miles
Unit
Number
www.consumerreports.org
www.jdpower.com
www.jdpower.com
www.autonews.com
www.jdpower.com
Number
www.consumerreports.org
Number
www.edmunds.com
81
www.edmunds.com
and 0.9. Such vast differences in the ranges of the variables make
inference, interpretation, and comparison of parameter estimates
difficult. The typical approach to overcome this issue is to
standardize the variables. This approach, however, may not
always be preferable (Blalock 1961; Bring 1994; King 1986). An
alternative approach is to use a log-transformation to compress the
range of the variables that have a wide range and to expand the
range of variables that have a narrow range. This is the approach
that we take. Specifically, we use the log-transformed versions of
the three endogenous variables, as well as of all of the continuous
exogenous variables. We, however, include the variables NEW,
Table 2
Summary statistics of variables in the data.
1
2
3
4
5
6
7
8
10
1.00
0.19
1.00
0.12
0.08
1.00
0.08
0.24
0.43
1.00
0.25
0.17
0.30
0.73
1.00
0.13
0.20
0.04
0.02
0.11
1.00
0.32
0.16
0.07
0.31
0.37
0.51
1.00
0.28
0.18
0.62
0.77
0.53
0.03
0.02
1.00
0.09
0.27
0.54
0.80
0.58
0.03
0.13
0.76
1.00
Variable
Mean
Minimum
Median
Maximum
Advertising
spending
(ADV)
Total word of
mouth for a
brand (WOM)
Customer
satisfaction
(CS)
Price (PRICE)
Miles per gallon
(MPG)
Sales (SALES)
Number of
models offered
under a brand's
name (NUM)
Number of new
models
introduced in a
year (NEW)
Number of
models of a
brand endorsed
by Edmunds
(EDGOOD)
295,538
15,330
216,375
907,455
406.3
210.5
2195
0.66129
0.44
0.64041
0.9
31,715
21.877
13,578
6.389
27,940
22.457
88,413
32.5
270,480
2.964
3513
1
119,055
2
1,450,130
11
0.6377
0.7826
82
Table 4
Estimates of simultaneous equation models for word of mouth data from
Edmunds.
Variables
2.364 (5.403)
0.943(0.265)***
0.674(0.175)***
0.014(0.078)*
0.066(0.360)
0.038(0.221)
0.500(0.230)**
0.741(0.233)***
0.939(0.260)***
0.623(0.249)**
2.793 (1.962)
0.650 (0.192)***
1.045 (0.159)***
0.027 (0.114)
0.029 (0.037)
0.025 (0.063)
0.023 (0.025)
0.493 (0.208)**
0.745 (0.231)***
0.928 (0.272)***
0.616 (0.234)***
Sales Equation
Both coefficients of ADV and WOM have significant, positive,
effects on sales. However, in terms of the magnitude of the
coefficients, advertising is larger than word of mouth implying the
effect of advertising on sales is larger than the effect of word of
mouth on sales. In addition, the coefficient of EDGOOD is
significant at 0.1 level and has a positive sign suggesting that
expert opinions can increase sales. The estimated effects of product
attributes, PRICE and MPG, however are not significant. We note,
however, that these findings are based on an aggregation of model
level values to the brand level (e.g., aggregation across all models
of the Honda brand to the brand level) and may change in a
disaggregate analysis at the model level. Finally, the four year
dummy variables are significant at the 0.05 level.
Advertising Equation
Toyota Scion
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84
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