Word-of-Mouth, Quality, and Advertising: Evidence from Movie Sales

Marketing is a crucial determinant of product success, particularly in the film industry where marketing budgets are comparable to production budgets. A rich theoretical literature predicts a positive relationship between advertising and product quality (e.g. Nelson, 1974). I examine this relationship by exploiting changes in the product quality information available to the distributors of 1,156 movies released between 1995 and 2003. Variation in weekly television advertising expenditures indicate that marketing expenditures react sharply to new information about film quality that is revealed during a film's opening weekend, including the results of exit polling, which studios use to infer word-of-mouth.