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Observational Learning and Social-Network Word-of-Mouth: Evidence from Groupon

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Abstract

This study explores how observational learning and social-network Word-of-Mouth (WOM) affect sales. Using a panel data set consisting of more than 500 deals from Groupon.com, we find that not only can both mechanisms help increase sales, they interact positively to generate additional sales. This complementarity result suggests observational learning and social-network WOM provide different types of informational signals to influence sales. While observational learning primarily updates consumer beliefs about a product, the predominant effect of social-network WOM is through advertising that complements the signaling effect of observational learning. We also compare these effects between search goods and experience goods. We find that observational learning and social-network WOM continue to be complements in both cases. However, compared to social-network WOM, observational learning has a stronger effect for experience goods than for search goods.

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... The field's understanding of consumer GB behavior may be constrained if either phase is neglected, because both purchase and redemption are key components of GB business models. We know of only one study (Li and Wu 2013) that explores the aggregated level of GB deal purchase (without consumer-level data). Extending Li and Wu's (2013) work, we focus on the disaggregated level (with consumer-level data). ...
... We know of only one study (Li and Wu 2013) that explores the aggregated level of GB deal purchase (without consumer-level data). Extending Li and Wu's (2013) work, we focus on the disaggregated level (with consumer-level data). Using this extensive data set, we also identify how deal popularity and other factors (deal price, savings, and customer experience) may differentially affect purchases in relation to redemptions. ...
... Thus, consumers can access this information again when they are ready to redeem. 8 Although we paid a great deal of attention to issues of model identification, this research may not perfectly identify causal impact, similar to other studies on GB and social influences (Li and Wu 2013;Sridhar and Srinivasan 2012;Zhang and Liu 2012). Unless researchers use randomized field experiments with corporate partners (Hinz et al. 2001;Lambrecht and Tucker 2013;Luo et al. 2014), it is difficult to identify causal effects in general. ...
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The difference and system generalized method-of-moments estimators, developed by Holtz-Eakin, Newey, and Rosen (1988, Econometrica 56: 1371-1395); Arellano and Bond (1991, Review of Economic Studies 58: 277-297); Arellano and Bover (1995, Journal of Econometrics 68: 29-51); and Blundell and Bond (1998, Journal of Econometrics 87: 115-143), are increasingly popular. Both are general estimators designed for situations with "small T , large N" panels, meaning few time periods and many individuals; independent variables that are not strictly exogenous, meaning they are correlated with past and possibly current realizations of the error; fixed effects; and heteroskedasticity and autocorrelation within individuals. This pedagogic article first introduces linear generalized method of moments. Then it describes how limited time span and potential for fixed effects and endogenous regressors drive the design of the estimators of interest, offering Stata-based examples along the way. Next it describes how to apply these estimators with xtabond2. It also explains how to perform the Arellano-Bond test for autocorrelation in a panel after other Stata commands, using abar. The article concludes with some tips for proper use. Copyright 2009 by StataCorp LP.
Article
A general formula (α) of which a special case is the Kuder-Richardson coefficient of equivalence is shown to be the mean of all split-half coefficients resulting from different splittings of a test. α is therefore an estimate of the correlation between two random samples of items from a universe of items like those in the test. α is found to be an appropriate index of equivalence and, except for very short tests, of the first-factor concentration in the test. Tests divisible into distinct subtests should be so divided before using the formula. The index [`(r)]ij\bar r_{ij} , derived from α, is shown to be an index of inter-item homogeneity. Comparison is made to the Guttman and Loevinger approaches. Parallel split coefficients are shown to be unnecessary for tests of common types. In designing tests, maximum interpretability of scores is obtained by increasing the first-factor concentration in any separately-scored subtest and avoiding substantial group-factor clusters within a subtest. Scalability is not a requisite.
Article
Social coupons are fast emerging as a popular marketing tool for businesses, an attractive shopping tool for consumers using them and a profitable business model for the social coupon service providers. But does the popularity of social coupons extend into providing short- and long-term profitability and new customers for the businesses? Through an analytical model, this paper answers the following questions: (1) Are social coupons profitable for businesses? (2) Can businesses influence social coupon profitability? (3) How can businesses recover the shortfall in profits from the coupon launch? (4) How long will it take for businesses to recover the shortfall in profits from the coupon launch? Using data from three different businesses, we find that social coupons in their current form are not ideally suited to ensure customer acquisition and yield profits for the businesses. Additionally, we discuss possible areas where social coupons might work. Several research questions for future testing are offered to explore this new area of marketing. KeywordsSocial coupons–Short-term profitability–Long-term profitability–Customer acquisition–Customer retention
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This article develops a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables. Our formulation clarifies the relationship between the existing estimators and the role of transformations in panel data models. We characterize the valid transformations for relevant models and show that optimal estimators are invariant to the transformation used to remove individual effects. We present an alternative transformation for models with predetermined instruments which preserves the orthogonality among the errors. Finally, we consider models with predetermined variables that have constant correlation with the effects and illustrate their importance with simulations.
Article
The “intangible” nature of e-commerce may cause shoppers to be uncertain about whether products ordered online will fit their needs or perform up to expectations. Such uncertainty is a dimension of consumer risk, or feelings that result because the actual outcome of a purchase decision can only be known in the future. However, the ability of e-retailers to offer a plethora of product-related information can ameliorate this uncertainty. This research assesses the influence of three online retailer communication practices—evoking vividness through pictures, allowing consumers to control information presentation, and presenting information from third-party sources. We demonstrate that these practices materially affect consumer perceptions of product performance uncertainty. Importantly, we also find that the influence of the practices differs by the search or experience orientation of the product, sometimes in counterintuitive ways. These results can serve to help enhance the effectiveness of e-retailers’ communications and, in the case of multichannel retailers, help determine which products are best suited for different channels.
Article
Estimation of the dynamic error components model is considered using two alternative linear estimators that are designed to improve the properties of the standard first-differenced GMM estimator. Both estimators require restrictions on the initial conditions process. Asymptotic efficiency comparisons and Monte Carlo simulations for the simple AR(1) model demonstrate the dramatic improvement in performance of the proposed estimators compared to the usual first-differenced GMM estimator, and compared to non-linear GMM. The importance of these results is illustrated in an application to the estimation of a labour demand model using company panel data.
Conference Paper
Crowd-funding markets have recently emerged as a new source of capital supporting entrepreneurial ideas and ventures. In these markets, any individual is capable of proposing an idea, and interested others can then contribute funds in support of it. Given the recency of crowd-funding's emergence, participants' behavior in these markets is not yet well understood. From a social influence standpoint, these markets are unique because the timing and amount of others' prior contribution decisions are publicly observable. This observable information about prior contributions is therefore likely to have an influence on later contribution decisions. We empirically examine this notion in a crowd-funded market for online journalism. Bearing in mind that prior literature has identified online journalism as a form of public good, we find that funders in this marketplace treat one another's contributions as substitutable, a behavior that may be indicative of free riding. Practical and theoretical implications are discussed.
Article
Abstract In this paper, we investigate the effectiveness of the firm’s proactive management of customer-to-customer communication. We are particularly interested in understanding how, if at all, the firm should go about effecting meaningful word-of-mouth. To tackle this problem, we collect data from two sources: 1) We implemented,a large-scale field test in which a national firm created word of mouth,through,two populations: customers and non-customers, 2) We collected data from an online experiment. We break our theoretical problem into two subproblems. First, we ask, “What kind of WOM drives sales?” Motivated by previous research, we hypothesize that for a product with a low initial awareness level, the WOM that is most effective at driving sales is created by less-loyal (not highly-loyal) customers, and occurs between acquaintances (not friends). We find support for this in the field test as well as in an experimental,setting. Hence we demonstrate the potential usefulness of exogenously-created WOM: conversations,are created where,none would naturally have occured otherwise. Then, we ask, “Which agents are most effective at creating this kind of WOM?” In particular, we are interested in evaluating the effectiveness of the commonly-used opinion leader designation. We find that while opinion leadership is useful in identifying potentially effective spreaders of WOM among very loyal customers, it is less useful for the sample of less loyal customers. Keywords: Word of Mouth, Promotion, Advertising 1I ntroduction
Article
I examine how information technology (IT) skills and use, communication network structures, and the distribution and flow of information in organizations impact individual information worker productivity. The work is divided into three essays based on the task level practices of information workers at a midsize executive recruiting firm: Essay 1: "Information, Technology and Information Worker Productivity: Task Level Evidence." I develop and econometrically test a multistage model of production and interaction activities at the firm, and analyze correlations among network structure, characteristics of information flow and real economic output. I find that (a) IT use is positively correlated with non-linear drivers of productivity; (b) the structure and size of workers' communication networks are highly correlated with performance; (c) an inverted-U shaped relationship exists between multitasking and productivity such that, beyond an optimum, more multitasking is associated with declining project completion rates and revenue generation; and (d) asynchronous information seeking such as email and database use promotes multitasking while synchronous information seeking over the phone shows a negative correlation. These data demonstrate a strong correspondence among technology use, social networks, and productivity for project-based information workers.
Article
This paper tries to show how the major features of the behavior of advertising can be explained by advertising's information function. For search qualities advertising provides direct information about the characteristics of a brand. For experience qualities the most important information conveyed by advertising is simply that the brand advertises. This contrast in advertising by these qualities leads to significant differences in its behavior. How does advertising provide information to the consumer? The producer in his advertising is not interested directly in providing information for consumers. He is interested in selling more of his product. Subject to a few constraints, the advertising message says anything the seller of a brand wishes. A mechanism is required to make the selling job of advertising generate information to the consumer. [Авторский текст]
Article
The author analyzes a sequential decision model in which each decisionmaker looks at the decisions made by previous decisionmakers in taking her own decision. This is rational for her because these other decisionmakers may have some information that is important for her. The author then shows that the decision rules that are chosen by optimizing individuals will be characterized by herd behavior; i.e., people will be doing what others are doing rather than using their information. The author then shows that the resulting equilibrium is inefficient. Copyright 1992, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Article
The difference and system generalized method of moments (GMM) estimators are growing in popularity. As implemented in popular software, the estimators easily generate instruments that are numerous and, in system GMM, potentially suspect. A large instrument collection overfits endogenous variables even as it weakens the Hansen test of the instruments' joint validity. This paper reviews the evidence on the effects of instrument proliferation, and describes and simulates simple ways to control it. It illustrates the dangers by replicating Forbes ["American Economic Review" (2000) Vol. 90, pp. 869-887] on income inequality and Levine "et al." ["Journal of Monetary Economics"] (2000) Vol. 46, pp. 31-77] on financial sector development. Results in both papers appear driven by previously undetected endogeneity. Copyright (c) Center for Global Development 2009.
Article
The creation of online consumer communities to provide product reviews and advice has been touted as an important, albeit somewhat expensive component of Internet retail strategies. In this paper, we characterize reviewer behavior at two popular Internet sites and examine the effect of consumer reviews on firms' sales. We use publicly available data from the two leading online booksellers, Amazon.com and BarnesandNoble.com, to construct measures of each firm's sales of individual books. We also gather extensive consumer review data at the two sites. First, we characterize the reviewer behavior on the two sites such as the distribution of the number of ratings and the valence and length of ratings, as well as ratings across different subject categories. Second, we measure the effect of individual reviews on the relative shares of books across the two sites. We argue that our methodology of comparing the sales and reviews of a given book across Internet retailers allows us to improve on the existing literature by better capturing a causal relationship between word of mouth (reviews) and sales since we are able to difference out factors that affect the sales and word of mouth of both retailers, such as the book's quality. We examine the incremental sales effects of having reviews for a particular book versus not having reviews and also the differential sales effects of positive and negative reviews. Our large database of books also allows us to control for other important confounding factors such as differences across the sites in prices and shipping times.
Article
We propose that consumers often make choices that diverge from those of others to ensure that they effectively communicate desired identities. Consistent with this identity-signaling perspective, four studies illustrate that consumers are more likely to diverge from majorities, or members of other social groups, in product domains that are seen as symbolic of identity (e.g., music or hairstyles, rather than backpacks or stereos). In identity domains, participants avoided options preferred by majorities and abandoned preferences shared with majorities. The social group associated with a product influenced choice more in identity domains and when a given product was framed as identity relevant. People diverge, in part, to avoid communicating undesired identities. (c) 2007 by JOURNAL OF CONSUMER RESEARCH, Inc..
Creating Social Contagion through Viral Product Design: A Randomized Trial of Peer Influence in Networks
  • S Aral
Online Social Interactions: A Natural Experiment on Word of Mouth Versus Observational Learning
  • Y Chen