A Dynamic Model of Brand Choice When Price and Advertising Signal Product Quality

• Published in: Marketing science (Providence, R.I.) R.I.), 2008-11, Vol.27 (6), p.1111-1125
• Main Authors: Erdem, Tulin, Keane, Michael P, Sun, Baohong
• Format: Article
• Language: English
• Subjects: Advertising; advertising and price as signals of quality; Advertising campaigns; Advertising expenditures; Advertising signs; Analysis; Bayesian learning; Bayesian method; Brand equity; Brands; Business; Consumer advertising; Consumer behavior; consumer choice under uncertainty; Consumer goods; Consumer preferences; Consumer prices; Consumers; dynamic choice; Dynamic modeling; Evaluation; Households; Inventory; Ketchup; Market prices; Marketing; Marketing research; Modeling; Panel data; Price cuts; Pricing policies; pricing policy; Product choice; Product quality; Research Notes; signaling; Studies; Utility functions
• ISSN: 0732-2399; 1526-548X
• DOI: 10.1287/mksc.1080.0362

In this paper, we develop a structural model of household behavior in an environment where there is uncertainty about brand attributes and both prices and advertising signal brand quality. Four quality signaling mechanisms are at work: (1) price signals quality, (2) advertising frequency signals quality, (3) advertising content provides direct (but noisy) information about quality, and (4) use experience provides direct (but noisy) information about quality. We estimate our proposed model using scanner panel data on ketchup. If price is important as a signal of brand quality, then frequent price promotion may have the unintended consequence of reducing brand equity. We use our estimated model to measure the importance of such effects. Our results imply that price is an important quality-signaling mechanism and that frequent price cuts can have significant adverse effects on brand equity. The role of advertising frequency in signaling quality is also significant, but it is less quantitatively important than price. In the printed version of Marketing Science , Vol. 27, No. 6, Erdem et al. (2008) was mistakenly identified as a Research Note. It is a regular article and has been corrected here and in the online table of contents.