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Abstract

The purpose of this paper is to examine empirically how to balance advertising expenditure before and after launch with regard to the direction of word of mouth in the motion picture industry. The vector auto-regression model is applied to assess the dynamic impact of advertising and word of mouth on sales. Empirical data, including advertising, word of mouth, and sales (the number of entries) of 83 movies are used for analysis. The research results show that for a movie having more positive word of mouth in the pre- and post-launch periods, it is worthwhile to spend the advertising budget in the pre-launch period only and to spare it in post-launch period. However, it is worthwhile to spare the advertising budget in the pre-launch period for movies having less positive word of mouth before and after launch, and to concentrate spending in post-launch period instead.
Mangers who handle products and services facing shortened lifecycles, such as games, eBooks, and digital music contents, need to check the quality of pre-launch word of mouth for their advertising budget decisions in the pre- and post-launch periods and spend more of the advertising budget in the post- (pre-) launch period if pre-launch word of mouth is negative (positive). For products and services with a shortened lifecycle, it is recommended to spend more of the advertising budget in the post- (pre-) launch period if pre-launch word of mouth is negative (positive).

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