|
Article Excerpt
This paper examines the effects of brand credibility, a central concept in information economics-based approaches to brand effects and brand equity, on consumer choice and choice set formation. We investigate the mechanisms through which credibility effects materialize, namely, through perceived quality, perceived risk, and information costs saved. The credibility of a brand as a signal is defined as the believability of the product position information contained in a brand, which depends on consumer perceptions of the willingness and ability of firms to deliver what they have promised. The choice set is defined as the collection of brands that have a nonzero probability of being chosen among those actually available for choice in a given context.
Furthermore, we study the impact of brand credibility on the variance of the stochastic component of utility. Not only do choice model parameters capture the impact of systematic utility differences on choice probabilities, but also the magnitude of this systematic impact is moderated by the relative importance of the stochastic utility component in preference. We term this moderation phenomenon preference discrimination, which we conceptualize as the decision makers' capacity to effectively discriminate between products' utilities in choice situations.
We estimate a discrete choice model of brand choice set formation and preference discrimination on experimental data in two categories--juice and personal computers--and find strong evidence for brand credibility effects and differential mechanisms through which brand credibility's impact materializes on brand choice conditional on choice set, choice set formation, and preference discrimination.
Key words: information economics; perceived quality; perceived risk; brand preference; branding; brand choice; choice models; personal computers; juice
History: This paper was received October 10, 2003, and was with the authors 24 months for 3 revisions; processed by Joel Huber.
1. Introduction
As "a name, term, sign, symbol or design, or a combination of them which is intended to identify the goods and services of one seller or a group of sellers and to differentiate them from those of competitors" (Kotler 1997, p. 443), the brand plays multiple roles in consumer choice. These roles may include brands' effects on consumer preferences; on brand and quantity choice; and on consideration, to name a few. Additionally, these effects may materialize through various mechanisms such as psychological (e.g., associative network memory), sociological (such as brand communities), and economic processes (brands as signals under uncertainty) (Keller 2002).
In this paper, we investigate the impact of brand credibility, a central concept in economics-based approaches to brand effects and brand equity, on consumer choice set formation and preference discrimination, the latter a concept on which we will subsequently elaborate. Brand credibility (the credibility of a brand as a signal) is defined as the believability of the product position information contained in a brand. This information depends on consumers' perceptions of the willingness and ability of firms to deliver what they have promised. This perceived willingness and ability to deliver constitute the two components of brand credibility: trustworthiness and expertise. When asymmetric information characterizes a market, economic agents (i.e., consumers and firms) may use signals (i.e., manipulable attributes or activities) to convey information about their characteristics (Spence 1974). To be effective, such signals must be credible (Tirole 1990). Previous literature has studied the credibility of a brand as a signal of quality or product positioning (Wernerfelt 1988, Rao and Ruekkert 1994, Erdem and Swait 1998).
We define the choice set as the brands that have a nonzero probability of being chosen among those actually available for choice in a given context, at the time of choice. We should note that in the literature some researchers used the terms consideration set and choice set interchangeably (for a review, see Roberts and Nedungadi 1995), while others have drawn a distinction. Following Shocker et al. (1991), we make such a distinction: although these are closely related constructs, consideration sets refer to long-term, dynamic sets that vary within and across usage and purchase occasions, whereas choice sets are conceptualized as the set of alternatives considered immediately prior to choice, and are thus more instantaneous in nature. (Of course, the choice set could itself be the end result of a dynamic process.) This paper proposes and shows that brand credibility not only affects choice set formation and conditional brand choice, but it also argues and tests for the differential mechanisms through which credibility operates at each stage.
Besides the impact of brand credibility on choice set formation, we also explore the effect of brand credibility on what we term preference discrimination. It is well known that in discrete choice models, many of which possess a characteristically sigmoidal shape (e.g., multinomial logit, nested logit, and probit), the more the slope coefficient grows in magnitude, the steeper the sigmoidal shape becomes. In fact, at one of its limits the sigmoidal shape will arbitrarily closely emulate a step function (see, e.g., Ben-Akiva and Lerman 1985, pp. 70-72). A behavioral interpretation of this phenomenon is that decision makers' capacity to discriminate between alternatives may be higher in certain contexts. This discrimination can be conceptualized as preference discrimination, that is, a given consumer's choice probabilities will be consistently low or high for certain brands since the consumer can discriminate better among such alternatives. We conjecture that brand credibility will affect preference discrimination thus defined.
While previous research has explored the impact of credibility on product utility in adopting a structural equation modeling framework (Erdem and Swait 1998) and separately on brand consideration and choice (Erdem and Swait 2004), we investigate brand credibility's effect on choice set formation and brand choice, conditional on choice set in an integrated framework. For example, Erdem and Swait (2004) estimated simple binary logistic models on self-reported consideration data from several product categories and found evidence for brand credibility effects. These results call for further research since (a) one needs to test whether such effects are robust (for example, one needs to link brand choice to formation of subsets from the universal set in a unified framework, control for unobserved heterogeneity, and incorporate price in the model to explore the effect of brand credibility, none of which steps were taken in Erdem and Swait 2004); (b) it is of interest in itself to research the mechanisms through which brand credibility operates in brand choice conditional on choice set versus the choice set formation stage; (c) it is necessary to determine whether brand credibility also affects choice set formation, in addition to consideration (Erdem and Swait 2004). We tackle all three issues in this paper. Furthermore, in this paper we also investigate the impact of brand credibility (and the mechanisms through which these effects materialize) on preference discrimination. We conduct our analysis on experimental data collected through one study involving both the juice and personal computer (PC) product categories, and a second study involving only PCs. (1)
We review relevant literature and define the conceptual framework guiding our testing in [section] 2; we discuss our modeling approach and data in [section] 3 and our results in [section] 4. We conclude the paper with a discussion of managerial implications and future research.
2. Related Work and Conceptual Framework
2.1. Choice Set Formation and Brand Choice
Conditional on Choice Set Previous empirical work on how consumers may narrow attention to a subset of brands out of a bigger set has focused on modeling choices as the outcome of a two-stage process of consideration set or choice set formation and conditional brand choice (e.g., Swait and Ben-Akiva 1987a, b; Roberts and Lattin 1991; Andrews and Srinivasan 1995; Chiang et al. 1999).
However, there has been no published empirical model of consideration or choice set formation in the context of brand choice that explicitly captures the explanations offered for brands' effects on consideration or choice set formation. This is not to say that the wider literature has not considered appropriate theoretical bases for specifying consideration or choice set formation models. For example, Meyer (1979) formulated a theory of destination choice set formation, incorporating information availability and constraints; in the transportation demand area, Swait and Ben-Akiva (1987a, b) modeled the impact of different constraints on choice.
While empirical work tried to link choice or consideration set formation stages to the brand choice stage, the main approach in the literature to conceptualizing the formation of subsets from universal sets of alternatives has been the cost-benefit approach (Hauser and Wernerfelt 1990). This approach employs the expected utility maximization framework to advance the notion that consumers weigh the cost of brand evaluation for membership in this subset against the benefits of adding or dropping the brand. This approach based on expected utility maximization implies consumer uncertainty about brands, since consumers are unsure about the utility they would get from each available brand and, hence, need to make expected utility-expected cost calculations in forming their consideration or choice sets.
2.2. Brand Credibility
The importance of credibility under uncertainty has been established in several contexts (e.g., Xie and Shugan 2001, Godes and Mayzlin 2004). There is also a growing literature on the importance of brand credibility under consumer uncertainty. When consumers are uncertain about brands and the market is characterized by asymmetric information (i.e., firms know more than consumers do about their products), brands can serve as signals of product positions (Wernerfelt 1988). As a signal of product positioning, the most important characteristic of a brand is its credibility. A firm can use various marketing mix elements in addition to the brand to signal product quality: for example, charging a high price, offering a certain warranty, or distributing via certain channels. Each of these actions may or may not be credible depending on market conditions, including competitive and consumer behavior. However, credible signals that set brands apart from the individual marketing mix elements is that the former embody the cumulative effect of past marketing mix strategies and activities, as well as consumer interactions with the firm. This historical notion that credibility is based on the sum of past behaviors has been referred to as reputation in the information economics literature (see Herbig and Milewicz 1995).
Credibility is broadly defined as the believability of an entity's intentions at a particular time. It is posited to have two main components: trustworthiness and expertise. Thus, brand credibility is defined as the believability of the product information contained in a brand, which requires that consumers perceive that the brand have the ability (i.e., expertise) and willingness (i.e., trustworthiness) to continuously deliver what has been promised (if and when brands do not deliver what is promised, their brand equity will erode). (2)
Brand credibility, in turn, may (a) increase consumer expected attribute (e.g., quality) levels (Aaker 1991), (b) decrease the variance of consumer attribute beliefs, i.e., consumer perceived risk (3) (Srinivasan and Ratchford 1991), and (c) decrease information costs (Shugan 1980) by credibly signaling product positions when there is consumer uncertainty about brands (Erdem and Swait 1998, Montgomery and Wernerfelt 1992, Wernerfelt 1988).
2.3. Brand Credibility, Choice Set Formation, and Conditional Brand Choice
Such a signaling framework of brand effects on consumer brand utility and choice also implies that when there is consumer uncertainty about brands and information is costly to obtain or process, the credibility of a brand may be an important factor underlying the formation of choice sets (as well as consideration sets; see Erdem and Swait 2004). The higher perceived value and lower perceived risk associated with a higher-credibility brand are anticipated to increase expected benefits (Hauser and Wernerfelt 1990). Additionally, the lower information costs associated with credible brands are likely to decrease expected costs, while the credibility of a brand decreases perceived risk because it increases consumers' confidence in a firm's product claims. Credibility also decreases information costs since consumers may use credible brands as a source of knowledge to economize on information gathering and processing costs (e.g., reading Consumer Reports or doing online searches for product reviews).
In the context of brand choice, the cost-benefit approach implies consumer uncertainty about the attributes (i.e., quality) of brands. Although not explicitly included in models of consideration or choice set formation and brand choice, models of Bayesian learning (Roberts and Urban 1988, Erdem and Keane 1996) are consistent with a cost-benefit approach based on expected utility maximization to model brand evaluations. Erdem and Keane (1996) model consumers' learning about imperfectly known product attributes through advertising and experience, which alters consumers' mean attribute evaluations (expected quality) and their variance (perceived risk). Their model is consistent with Howard and Sheth's (1969) theory of formation of subsets from universal sets of alternatives, which posits that consumers will try different brands to learn about them and then buy from among only a small subset of available brands. Mehta et al. (2003) estimated such an explicit model on scanner panel data; in their model, experience provides information about brands and reduces consumer uncertainty.
We postulate that the more credible the brand, the greater the likelihood of a consumer including it in his choice set due to its possible impact on perceived quality, perceived risk, and information costs. While this notion follows directly from the cost-benefit approach (Hauser and Wernerfelt 1990), the magnitude of credibility's impact on choice set formation versus its impact on the conditional brand choice stage, and the differential mechanisms through which brand credibility may operate at these two stages, have not been tested explicitly.
2.4. Brand Credibility and Preference Discrimination
Choice models are used to predict behavior as a function of attribute-based utility differences. To elaborate and set the stage for subsequent explanations, we remind...
|
