Description:
<jats:p> Prior behavioral research has suggested that advertising can influence a consumer's quality evaluation through informative and transformative effects. The informative effect acts directly to inform a consumer of product attributes and hence shapes her evaluations of brand quality. The transformative effect affects the consumer's evaluation of brand quality by enhancing her assessment of her subsequent consumption experience. In addition, advertising may influence a consumer's utility directly, even without providing any explicit information—this is the persuasive effect. </jats:p><jats:p> In this paper, we propose a framework that formally models the processes through which all three effects of advertisements impact consumers' brand evaluations and their subsequent brand choice decisions. In particular, we model source credibility, confirmatory bias, and bounded rationality on the part of consumers, by appropriately modifying the standard Bayesian learning approach. Our model conforms closely to prior behavioral literature and the experimental findings therein. In our empirical analysis, we get significant estimates of both informative and transformative effects across brands. We find interesting temporal patterns across the effects; for instance, the importance of transformative effects seem to grow over time, while that of informative effects diminishes. Finally, we conduct policy experiments to examine the impact of increased ad intensity on advertising effects, as well as the role played by consumption ambiguity. </jats:p>