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The Risk Reduction Role of Advertising

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  • Dmitri Byzalov
  • Ron Shachar

Abstract

This study shows theoretically and empirically that exposure to advertising increases consumers’ tendency to purchase the promoted product because the informative content of advertising resolves some of the uncertainty that the risk averse consumers face and thus reduces the risk associated with the product. We call this effect the “risk-reduction” role of advertising. The risk-reduction model implies that advertising effectiveness depends on (a) the risk preference parameter, (b) the precision of the advertising message, (c) the familiarity of the consumer with the product, (d) the consumer’s sensitivity to products’ attributes (and thus, her involvement level with the product), and (e) the diversity of products offered by multiproduct firms. These findings suggest that ads spending should be higher (a) for new and relatively unknown products, (b) for high-involvement products, (c) when ads can be quite precise, and (d) when the firm offers a diverse product-line. It also implies that ads should target consumers (a) who are more sensitive to risk, (b) who are more involved, and (c) those who are not familiar with the promoted product. The model allows ads to affect choices also through a direct effect on the utility (i.e., the standard approach to formulate the effect of advertising). In our empirical example (where the products are television shows) the risk-reduction effect is significant and strong and the direct effect is negligible behaviorally. We discuss the welfare implications of these findings, and illustrate the quantitative differences in managerial implications between our model and the traditional one. Copyright Springer Science+Business Media, Inc. 2004

Suggested Citation

  • Dmitri Byzalov & Ron Shachar, 2004. "The Risk Reduction Role of Advertising," Quantitative Marketing and Economics (QME), Springer, vol. 2(4), pages 283-320, December.
    • Handle: RePEc:kap:qmktec:v:2:y:2004:i:4:p:283-320
    DOI: 10.1007/s11129-004-0153-x
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    Citations

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    Cited by:

    1. Haiyan Liu, 2016. "A Structural Model of Advertising Signaling and Social Learning: The Case of the Motion Picture Industry," Working Papers 0216, University of South Florida, Department of Economics.
    2. Kenneth C. Wilbur, 2008. "A Two-Sided, Empirical Model of Television Advertising and Viewing Markets," Marketing Science, INFORMS, vol. 27(3), pages 356-378, 05-06.
    3. van Heerde, H.J. & Helsen, K. & Dekimpe, M.G., 2005. "Managing Product-Harm Crises," ERIM Report Series Research in Management ERS-2005-044-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    4. Fuchs, Galia & Reichel, Arie, 2011. "An exploratory inquiry into destination risk perceptions and risk reduction strategies of first time vs. repeat visitors to a highly volatile destination," Tourism Management, Elsevier, vol. 32(2), pages 266-276.
    5. G. R. Chen, 2014. "How do advertised brands benefit from private labels? An application of rational expectations models," Applied Economics, Taylor & Francis Journals, vol. 46(24), pages 2891-2902, August.
    6. Dr. Makarand Upadhyaya, 2015. "The Impact of Humorous Television Advertisement in Customer Opinion in Bahrain," Indian Journal of Commerce and Management Studies, Educational Research Multimedia & Publications,India, vol. 6(3), pages 20-25, September.
    7. Xinlei Chen & Yuxin Chen & Charles Weinberg, 2013. "Learning about movies: the impact of movie release types on the nationwide box office," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 37(3), pages 359-386, August.
    8. Gomes, Orlando, 2006. "The dynamics of television advertising with boundedly rational consumers," MPRA Paper 2847, University Library of Munich, Germany.
    9. Ivy E.D. Schultz & Michelle H. Kovacs & Dirk P. Janssen, 2016. "The perceived risk and the high involvement product purchase: Location-based advertisements using fearful and sensual appeals as risk reduction strategy in condom purchases," Cogent Business & Management, Taylor & Francis Journals, vol. 3(1), pages 1254387-125, December.
    10. Karthik Sridhar & Ram Bezawada & Minakshi Trivedi, 2012. "Investigating the Drivers of Consumer Cross-Category Learning for New Products Using Multiple Data Sets," Marketing Science, INFORMS, vol. 31(4), pages 668-688, July.
    11. Tao Chen & Yi Huang & Chen Lin & Zixia Sheng, 2022. "Finance and Firm Volatility: Evidence from Small Business Lending in China," Management Science, INFORMS, vol. 68(3), pages 2226-2249, March.
    12. Cleeren, K. & Dekimpe, M.G. & Helsen, K., 2008. "Weathering product-harm crises," Other publications TiSEM 283b51f8-dd35-4a10-930a-8, Tilburg University, School of Economics and Management.
    13. Hajibaba, Homa & Boztuğ, Yasemin & Dolnicar, Sara, 2016. "Preventing tourists from canceling in times of crises," Annals of Tourism Research, Elsevier, vol. 60(C), pages 48-62.
    14. Erik Maier & Robert Wilken & Florian Dost, 2015. "The double benefits of consumer certainty: combining risk and range effects," Marketing Letters, Springer, vol. 26(4), pages 473-488, December.
    15. Yi Zhao & Sha Yang & Vishal Narayan & Ying Zhao, 2013. "Modeling Consumer Learning from Online Product Reviews," Marketing Science, INFORMS, vol. 32(1), pages 153-169, May.
    16. Du, Ding & Osmonbekov, Talai, 2020. "Direct effect of advertising spending on firm value: Moderating role of financial analyst coverage," International Journal of Research in Marketing, Elsevier, vol. 37(1), pages 196-212.
    17. Sridhar Narayanan & Puneet Manchanda, 2009. "Heterogeneous Learning and the Targeting of Marketing Communication for New Products," Marketing Science, INFORMS, vol. 28(3), pages 424-441, 05-06.
    18. Andrew T. Ching & Masakazu Ishihara, 2012. "Measuring the Informative and Persuasive Roles of Detailing on Prescribing Decisions," Management Science, INFORMS, vol. 58(7), pages 1374-1387, July.
    19. Harald Van Heerde & Kristiaan Helsen & Marnik G. Dekimpe, 2007. "The Impact of a Product-Harm Crisis on Marketing Effectiveness," Marketing Science, INFORMS, vol. 26(2), pages 230-245, 03-04.
    20. Hongjuan Song & Yushi Jiang, 2019. "Dynamic pricing decisions by potential tourists under uncertainty: The effects of tourism advertising," Tourism Economics, , vol. 25(2), pages 213-234, March.
    21. Nitin Mehta & Xinlei (Jack) Chen & Om Narasimhan, 2008. "Informing, Transforming, and Persuading: Disentangling the Multiple Effects of Advertising on Brand Choice Decisions," Marketing Science, INFORMS, vol. 27(3), pages 334-355, 05-06.

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