Edited by Sadie Harley, reviewed by Andrew Zinin
Research published in Information Systems Research finds that social media marketing (SMM) does little to help high-quality firms stand apart from competitors. Instead, it often pushes companies of all quality levels toward similar spending and pricing strategies, blurring the very signals firms hope will differentiate them in digital marketplaces.
The INFORMS study, “Signalling Quality to Consumers: The Role of Social Media Marketing,” was authored by Qinquan Cui and Kenan Arifoğlu of University College London and Dongyuan Zhan of the University of Science and Technology of China.
Social media platforms have transformed the way consumers learn about products. Unlike traditional advertising, where firms broadcast one-way messages to increase awareness, SMM allows consumers themselves to generate and share information such as reviews, ratings, comments, and peer recommendations, all of which influence perceived product quality.
As a result, firms increasingly rely on SMM both to expand their customer base and to influence the external information consumers receive.
“Firms often believe that spending more on social media marketing helps signal superior product quality,” said Cui. “However, when we modelled this environment using a game-theoretic approach, we found that high-quality firms cannot reliably use SMM spending to separate themselves from mid- or low-quality competitors.”
Game-theoretic approach is a way of analysing situations where multiple decision-makers (players) interact, and the outcome for each depends not only on their own choices but also on the choices of others. Game theory provides a formal mathematical framework to predict behaviour, identify optimal strategies, and understand incentives in competitive or cooperative environments.
To analyse the strategic interactions in their study, the researchers studied two scenarios: a benchmark case, where SMM only increases product awareness; and an information-revelation case, where SMM also improves the precision of online reviews and other external factors.
In the benchmark case, the researchers found that firms cannot credibly signal their product quality simply through different SMM spending levels. What they found was that two things can happen: first, there can be something called “partial pooling,” where low- and mid-quality firms choose the same level of SMM spending, while at the same time, high-quality firms separate by spending less; second, there can be “full pooling,” where all firms spend the same amount.
“We discovered that higher-quality firms actually limit their SMM spending to maintain a smaller but more profitable customer base,” said Arifoğlu. “Spending more would invite lower-quality firms to mimic them, making separation impossible.”
That said, when SMM does play a specific information-revelation role, meaning it makes online signals like reviews more accurate, the challenge intensifies. The study found that only full pooling or a limited form of partial pooling can occur, and that high-quality firms find it even harder to distinguish themselves from lower-quality firms.
In a sense, when all firms spend at the same level on SMM, a commoditization of messaging and branding can happen.
“In situations where SMM enhances the precision of online reviews, mid- and low-quality firms actually lose some of their incentives to pool with high-quality firms,” Zhan said.
“But high-quality firms also cannot set themselves apart. In the end, the information glut created by SMM spending by mid- to low-quality firms makes it more of a challenge for high-quality firms to differentiate.”
The authors conclude that SMM may not be the most effective quality-signalling tool for firms in competitive environments. Rather, high-quality firms may benefit from moderating their SMM spending rather than increasing it, and being more focused and innovative in their marketing to their highest-value market segments.
Feature image credit: Unsplash/CC0 Public Domain
