Does advertising indicate product quality? Evidence from prelaunch and postlaunch advertising in the movie industry
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Does advertising indicate product quality? Evidence from prelaunch and postlaunch advertising in the movie industry Reo Song 1 & Sungha Jang 2 & Gangshu (George) Cai 3
# Springer Science+Business Media New York 2015
Abstract Literature on the informative role of advertising indicates that advertising quantity can serve as an indicator of product quality. As product life cycles grow shorter, firms in many industries spend significant amounts on advertising during the prelaunch period to create large initial demand. Thus, the role of prelaunch advertising may differ from that of postlaunch advertising, and a proper understanding of these differences is important. This study provides an empirical investigation of whether advertising is a reliable indicator of quality before and after product launches, using the data from the movie industry. Analyses of 1078 movies released during 2003–2011 show that postlaunch advertising is a reliable quality indicator and increases revenues, whereas prelaunch advertising is not a reliable quality indicator, even if it leads to higher revenues. Keywords Advertising . Informative role . Product quality . Entertainment marketing
1 Introduction Is advertising a reliable indicator of product quality, in prelaunch and postlaunch periods? Despite a rich stream of literature on advertising and quality signals (e.g., * Reo Song [email protected] Sungha Jang [email protected] Gangshu (George) Cai [email protected] 1
Department of Marketing, College of Business of Administration, California State University, Long Beach, CA 90840, USA
2
Department of Marketing, College of Business, Kansas State University, Manhattan, KS 66506, USA
3
Department of Operations Management and Information Systems, Leavey School of Business, Santa Clara University, Santa Clara, CA 95053, USA
Mark Lett
Milgrom and Roberts 1986), most studies examine the role of advertising only after a product has been introduced; a limited number of studies address the changing roles of advertising over time (e.g., Basuroy et al. 2006). Yet, in many product categories, including movies, video games, music, and high-technology products, firms devote significant expenditures to prelaunch advertising. For example, large movie studios typically spend more than 80 % of their total advertising budget in the prelaunch period (Elberse and Anand 2007). Because the life cycles of these product categories are short, firms rely on prelaunch advertising to create large initial demand and enhance their returns on investment. In this sense, it is important to understand the role of prelaunch advertising and distinguish it from the role of postlaunch advertising to help firms effectively allocate their advertising budgets. We empirically test the relationship between the amount of advertising and product quality in prelaunch and postlaunch periods, using data from the movie industry, which represents a good empirical setting for this study. Movie studios allocate vast advertising budgets to the prelaunch period, so the impact of prelaunch adverti
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