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Advertising strategy in the presence of reviews: An empirical analysis

Brett Hollenbeck, Sridhar Moorthy and Davide Proserpio

MPRA Paper from University Library of Munich, Germany

Abstract: We study the relationship between online reviews and advertising spending in the hotel industry. Combining a dataset of TripAdvisor reviews with other datasets describing these hotels’ advertising expenditures, we show, first, that online ratings have a causal demand-side effect on ad spending. Second, this effect is negative: hotels with higher ratings spend less on advertising than hotels with lower ratings. This suggests that hotels treat TripAdvisor ratings and advertising spending as substitutes, not complements. Third, the relationship is stronger for independent hotels than for chains, and stronger in less differentiated markets than in more differentiated markets. The former suggests that a strong brand name continues to provide some immunity to reviews and the latter that the advertising response is stronger when ratings are more likely to be pivotal. Finally, we show that the relationship between online ratings and advertising has strengthened over time, just as TripAdvisor has become more popular, implying that firms respond to online reviews if and only if consumers respond to them.

Keywords: Online reviews; advertising; regression discontinuity (search for similar items in EconPapers)
JEL-codes: L1 L15 L20 M31 M37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind, nep-mkt and nep-pay
Date: 2019-03-14
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

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https://mpra.ub.uni-muenchen.de/92753/1/MPRA_paper_92753.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/93496/1/MPRA_paper_92753.pdf revised version (application/pdf)

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