Early-Entrant Advantage, Word-of-Mouth Communication, Brand Similarity, and the Consumer Decision-Making Process

To better understand the competitive dynamics between an early and a later entrant, the present study examines the extent to which word-of-mouth regarding the later entrant and the later entrant’s similarity to the early entrant influences the consumer decision process. The authors hypothesize that the influence of word-of-mouth and similarity depends on the nature of the decision-making task, which is theorized as either stimuli-based or memory-based tasks. A three-stage sequential-logit model with two focal brands (the early and later entrants) is developed to test the influence of independent measures on the likelihood of (1) retrieval, (2) consideration, given retrieval, and (3) choice, give consideration, for both the early entrant and the focal-follower. Data from two experiments provides support for the multi-stage conceptualization of the consumer decision process and demonstrates that the effects of word-of-mouth communication and similarity depend on the nature of the decision-making task. Brands often benefit by virtue of being the first-to-market (e.g., Kalyanaram, Robinson, and Urban 1995; Kerin, Varadarajan, and Peterson 1992). Consequently, investigating the psychological mechanisms that drive the pioneering advantage has become a major topic in the marketing literature (e.g., Carpenter and Nakamoto 1989). Nevertheless, a majority of brands are late movers—not pioneers. For this reason, counteracting the pioneering advantage with late-mover strategies is essential for the long-term survival of most brands (e.g., Bowman and Gatignon 1996; Shankar 1999). The present research moves toward understanding the competitive dynamics between a later-entrant (a follower) and an early-entrant by studying the effects of word-of-mouth communication regarding a follower and the follower’s perceived similarity to the early-entrant on the consumer decision-making process. Word-ofmouth communications is an important source of consumer information; it forms the basis of interpersonal influence and determines the relevance of information (e.g., Mahajan, Muller, and Bass 1990). Brand similarity is said to influence the manner in which consumers organize and compare brands in a product-market (e.g., Tversky 1977) and is an important building block for brand positioning strategies (e.g., Sujan and Bettman 1989). Our research studies the robustness of the early-mover advantage by investigating the joint interplay of word-of-mouth communication and brand similarity. Research on the psychological drivers of the pioneering advantage has investigated the various processes by which judgments concerning the pioneer are formed. For example, Carpenter and Nakamoto (1989) examine an anchoring-and-adjustment based preference evolution process to explain the pioneering advantage. Following Kardes et al. (1993), who theorize that the early entrant advantage emanates from the consumer decision-making process, we investigate three fundamental components of decision-making: retrieval, consideration, and choice. However, unlike Kardes et al. (1993), who were interested only in the pioneering brand, we examine consumers’ reactions to both the early-entrant and focal-follower at each stage of the decision-making process. Although our theoretical framework draws on the pioneering literature, our focus is not on the pioneer per se. Rather, we study the effect of brand sequence on consumers’ perceptions in an extant category. To develop our hypotheses, we integrate literature on (1) the psychological mechanisms for the pioneering advantage, (2) word-of-mouth communications, (3) brand similarity, and (4) phased decision-making. With this integration, we hope to provide insights into market dynamics for the competition between a follower and the early entrant. The contextual dependence of our results discredits the one-size-fits-all notion of the pioneering advantage and demonstrates that the varying effects of word-of-mouth communication and similarity are a function of the decision-making task. Conceptual Background and Research Hypotheses Although pioneering a new market can be risky, if successful, it can bring higher market share, higher profits, and lower costs (e.g., Kerin, Varadarajan, and Peterson 1992). Since the seminal work of Carpenter and Nakamoto (1989), research on the psychological mechanisms that underlie the pioneering advantage has gained momentum (e.g., Kardes and Kalyanaram 1992). This research suggests that the pioneering advantage occurs because pioneers inordinately influence consumer preferences (Carpenter and Nakamoto 1989). This role of pioneering gives rise to higher retrieval of information related to the pioneer, which leads to biases in consumer judgments in the favor of the pioneer (Kardes et al. 1993). A majority of brands, however, are not pioneers. Thus, given that pioneers often earn disproportionate market share advantages, some researchers have focused on late-mover strategies aimed at overcoming the pioneering advantage (e.g., Zhang and Markman 1998). For instance, Carpenter and Nakamoto (1990) show that in the presence of a dominant pioneer, the optimal strategy for the late entrant is to differentiate from the pioneer, whereas in the presence of a weak pioneer, the optimal strategy is to challenge the pioneer. Indeed, understanding the psychological mechanisms that drive pioneering advantage and appropriate follower strategies are critical for developing a market-driven theory of competitive advantage (Carpenter, Glazer, and Nakamoto 1997). In the present research, we study the robustness of an early-entrant advantage by examining the significance of word-of-mouth communication regarding a follower brand and its similarity to the early-entrant on the consumer decision-making process. Research suggests that consumers use a sequential decision making process to reduce decision complexity (e.g., Bettman 1979). Shocker et al. (1991) suggest that for complex decisions, the consumer decision-making process consists of three distinct stages. The first stage begins with a universal set, which consists of all brands available in a product-market and evolves into a retrieval set, wherein a consumer can access from memory a subset of brands from the universal set. Partial exposure to brand information and the selective encoding of information to which a consumer is exposed result in retrieval sets being much smaller than universal sets. The second stage involves the formation of a consideration set, comprising a subset of brands from the retrieval set which are suitable for a particular purchase occasion, while in the final stage of the decision-making process involves the selection of one brand from the consideration set (Kardes et al. 1993). Word-of-Mouth (WOM) communication is an important source of consumer information. It forms the basis of interpersonal communications and significantly influences product evaluations and purchase decisions (e.g., Mahajan, Muller, and Bass 1990). In fact, WOM has been shown to be more powerful than printed information (Borgida and Nisbett 1977), primarily because WOM information is considered to be more credible. We conceptualize WOM in a broad context that includes most forms of noncommercial advertising and consider two important characteristics. First, we examine the manner in which WOM is presented, i.e., pallid and vivid cases (Herr, Kardes, and Kim 1991). For the pallid WOM case, we attribute information to consumer reports (a credible source) and therefore we use a loose definition of WOM. Second, we investigate the dynamics propagated by negative (versus positive) WOM. Vivid versus Pallid Information. Vividly presented information (versus pallid information) tends to be more accessible from memory and weighed more heavily in consumers’ judgments (e.g., Kisielius and Sternthal 1984). Herr, Kardes, and Kim (1991) find that anecdotal information presented in a face-to-face manner (i.e., vivid WOM) has a significantly greater impact on product judgments than the same information presented in printed mode (i.e., pallid condition). They argue that prior impressions are easy to interpret, and hence influence encoding and retrieval processes in such a way as to reduce the correspondence between objective and perceived cue diagnosticity. Consequently, prior beliefs formed by vivid WOM information (versus beliefs formed by pallid information) are more accessible and held with a higher degree of confidence. Thus, to the extent that WOM makes information more accessible from the memory, we expect vivid WOM (versus pallid printed) information regarding a focal-follower to enhance the retrieval likelihood of the focal following brand. Given that humans have limited cognitive capabilities and vivid information draws a disproportional amount of cognition, we also expect recall for the early-entrant to decline (a competitor of the focal follower). Other things being equal, we also anticipate that vivid WOM (versus pallid printed) communication will have a greater influence on product judgments. Therefore, we expect this influence to manifest itself in higher (lower) likelihood of consideration and choice for the focal-follower (early-entrant). (We use the subscript “F” and “E” to indicate a hypothesis for the focal-follower and the early-entrant respectively). H1F WOM communications (versus printed information) regarding the focal-follower will have a greater positive influence on the likelihood of (i) retrieval, (ii) consideration, given retrieval, and (iii) choice, given consideration, for the focal-follower. H1E WOM communications (versus printed information) regarding the focal-follower will have a greater negative influence on the likelihood of (i) retrieval, (ii) consideration, given retrieval, and (iii) choice, given consideration, for the early-entrant. WOM Valence. Because WOM is perceived as a relatively credible source of information, it is not surprising that the valence of WOM has a strong effect on consumer memory and judgment. However, findings on the importance of the valence of WOM are equivocal. For example, in a stimulus-based task, Herr, Kardes, and Kim (1991) find symmetric effects for negativeand positive-WOM, whereas in a memory-based task, Giese, Spangenberg, and Crowley (1996) do not find the symmetric effects. Research on categorization suggests that individuals categorize information at a level that is cognitively efficient (Rosch 1975; Cohen and Basu 1987). Clearly, the nature of decision-making task (stimulus versus memory) will influence the cognitively efficient categorization level. In a stimulus-based decision-making task, the information is unambiguously available in a consumer’s short-term memory or at point-of-purchase. Consistent with Herr, Kardes, and Kim (1991), we expect the valence of WOM to have a directionally consistent effect on both consideration and choice, given consideration for the follower (as in a stimulus-based task consumers need not rely on memory, the retrieval stage of the consumer decision-making process is irrelevant). Further, given that the earlyentrant competes with the follower, positive-WOM regarding the follower should injure the early-entrant and negative-WOM on the follower should benefit the early-entrant. H2F In a stimulus-based decision-making task, positive (negative) WOM regarding the focal-follower will increase (decrease) the likelihood of (i) consideration (ii) choice, given consideration, for the focal-follower. H2E In a stimulus-based decision-making task, positive (negative) WOM regarding the focal-follower will decrease (increase) the likelihood of (i) consideration (ii) choice, given consideration, for the early-entrant. A memory-based decision-making task is likely to elicit all three stages of the decision-making process (Shocker et al. 1991) and should encourage product-type categorization (Sujan and Dekleva 1987). Any WOM information is likely to be associated with the category exemplar, i.e., the earlyentrant, because early-entrants engender disproportionately higher influence on consumer preference formation than later-entrants (Carpenter and Nakamoto 1989), and because product-type is the likely level of categorization. This association of information with the prototypical brand occurs due to the ambiguity created by the decision environment (Muthukrishnan 1995). In our research, we simulate a complex product-market by sequentially introducing brands in two stages: the early-entrant first, followed by laterentrants. This situation simulates ambiguity due to both the large number of brands (complex market) and the sequential introduction of brands. Because WOM communication is vivid, it tends to be more accessible and weighed more heavily in judgments than printed information (Kisielius and Sternthal 1986). Thus, we expect WOM regarding the focal-follower, positive or negative, to be absorbed by the early-entrant. H3F In a memory-based decision-making task, positive (negative) WOM regarding the focal-follower will decrease (increase) the likelihood of (i) retrieval, (ii) consideration, given retrieval (iii) choice, given consideration, for the focal-follower. H3E In a memory-based decision-making task, positive (negative) WOM regarding the focal-follower will increase (decrease) the likelihood of (i) retrieval, (ii) consideration, given retrieval (iii) choice, given consideration, for the early-entrant. Similarity A critical aspect of brand positioning is how similar or dissimilar a brand is perceived to be to other brands in a product category (Sujan and Bettman 1989). The perceived similarity of the focal-follower to the early-entrant serves as a signal of the relative position of the two brands. Because early-entrants play a leading role in the formation of consumer preferences in a particular product category, it is often perceived as being typical of the category. Typicality, “the degree to which an item is perceived to represent a category” determines the competition a brand faces and the functions (e.g., usage occasions) that the brand performs for consumers (Loken and Ward 1990, p. 112). Thus, by being similar to or different from the early-entrant, the focal-follower defines its typicality to the product category. Because an early-entrant is likely to be perceived as relatively prototypical in a product-market, consumers are prone to compare the early-entrant with the follower and not vice versa (Carpenter and Nakamoto 1989). Research on the attraction effect would suggest that the perceived similarity of the follower to the early-entrant should influence the attractiveness of the early-entrant. Specifically, research on the attraction effect shows that, in a two-brand, two-attribute product market, where the competitor brand outperforms the target brand on one attribute and the target surpasses the competitor on the other attribute, the introduction of a new brand (usually referred to as the decoy) near the target brand tends to enhance preferences for the target brand (Huber and Puto 1983). Assuming that the early-entrant is perceived as a category exemplar and the follower as a relative decoy, the attraction effect literature suggests that as the similarity between the early-entrant and focal-follower increases, the likelihood of consideration and choice for the early-entrant should increase (e.g., Lehmann and Pan 1994; Ratneshwar, Shocker, and Stewart 1987). Further, research on order-of-entry shows that consumer recall for an earlyentrant brand tends to be higher than for a later-entrant (Kardes and Kalyanaram 1992). Because consumers are likely to compare the early-entrant to following brands, similarity between a follower brand and the early-entrant is likely to draw more attention to the early-entrant (versus the follower). Thus, we expect similarity to strengthen memory for the early-entrant, thereby producing higher rates of retrieval. Finally, research on the substitution effect (Huber, Payne, and Puto 1982) demonstrates that, for similar brands, the brand perceived to be dominant tends to take the lion’s share of the market (in our case the early-entrant dominates the focal later-entrant). Therefore, we expect preferences for the follower to decrease as it becomes more similar to the early-entrant and preferences for the early-entrant to increase. H4F The greater the similarity between the early-entrant and focal-follower, the lower the likelihood of (i) retrieval, (ii) consideration, given retrieval, and (iii) choice, given consideration, for the focal-follower. H4E The greater the similarity between the early-entrant and focal-follower, the higher the likelihood of (i) retrieval, (ii) consideration, given retrieval, and (iii) choice, given consideration, for the early-entrant. Interactions Between Word-of-Mouth and Similarity We expect the interaction between WOM and a later-entrant’s perceived similarity to the earlyentrant to depend on the decision-making task (i.e., stimulus-based or memory-based). In a stimulusbased decision-making task, the likelihood of information loss due to factors such as memory deterioration is not relevant. Research on consumer judgment suggests that in such situations consumers are likely to draw inferences from available information (Kardes 1994). Thus, as perceived similarity between the early-entrant and focal-follower increases, consumers are likely to assume that the two brands possess similar attributes. As a result, the effects of WOM regarding the focal-follower are likely to be shared with the early-entrant. These effects should vary directly with similarity between the two brands. Therefore, given high-perceived similarity, the early-entrant is likely to benefit more from positive (vs. negative) WOM regarding the follower. For the follower, positive-WOM should provide some credibility to its close positioning to the early-entrant (i.e., legitimacy by virtue of similarity to the early-entrant). In contrast, negative-WOM may bring into question the credibility of the follower’s positioning and augment the negative effects of similarity (i.e., the later-entrant may be viewed as an imposter). H5F In a stimulus-based decision-making task, positive (negative) WOM regarding the focal-follower will decrease (increase) the negative influence of similarity on the likelihood of (i) consideration, and (ii) choice, given consideration, for the focal-follower. H5E In a stimulus-based decision-making task, positive (negative) WOM regarding the focal-follower will increase (decrease) the positive influence of similarity on the likelihood of (i) consideration, and (ii) choice, given consideration, for the early-entrant. In complex product markets, we need to consider two important aspects of the decision-making situation. First, we expect the salience of the follower to increase as its similarity with the early-entrant increases, thereby making information about the follower more accessible from memory (Kardes and Kalyanaram 1992). Often, the salience of brands depends on external factors such as the format in which the information is conveyed (e.g., Finn 1988). In our case, by presenting the follower as similar to the early-entrant, we influence the format of the information and make it more salient (Alba, Hutchinson, and Lynch 1991). Second, the complexity of the decision-making task and limited cognitive capacity are likely to repress inference making (e.g., Muthukrishnan 1995). Taken together, these situational aspects result in (1) more accurate retrieval/recall of judgment-relevant information and (2) minimal inference making. In such cases, information retrieved from memory is likely to be used as a direct input (as opposed to inference drawing; Kardes 1994) and adjustments are likely to be insufficient, as limited human cognitive capacity precludes detailed processing (Hastie 1984). Therefore, we expect positive (negative) WOM regarding the follower to directly benefit (injure) the focal-follower and indirectly injure (benefit) the early-entrant. H6F In a memory-based decision-making task, positive (negative) WOM regarding the focal-follower will decrease (increase) the negative influence of similarity on the likelihood of (i) retrieval, (ii) consideration, given retrieval, and (iii) choice, given consideration for the early-entrant. H6E In a memory-based decision-making task, positive (negative) WOM regarding the focal-follower will decrease (increase) the positive influence of similarity on the likelihood of (i) retrieval, (ii) consideration, given retrieval, and (iii) choice, given consideration for the focal-follower. Method We use two experiments to test our hypotheses. Experiment 1 examines a five-brand product-market and involves a stimulus-based task. Thus, we model the consideration and the choice stages of the decision-making process. Experiment 2 studies a ten-brand (one early-entrant and nine followers) product market in a memory-based task and elicits the three stages (retrieval, consideration, and choice) of the consumer decision-making process. Estimation Procedure A derivation process that algebraically extends the derivation of Kardes et al.’s (1993) gave us the following log-likelihood function (the details of the derivation are available upon request from the authors). Kardes et al. (1993) consider only the pioneer brand for each stage of the consumer decisionmaking process, while we consider two brands—the early-entrant and focal follower—at each of the three stages of the decision-making process. Thus, our likelihood function is based on 15 outcomes (Figure 1). Specifically, we maximize the following log-likelihood function: