We develop a field experiment that assesses whether advertising can serve as a signal that enhances consumers’ evaluations of advertised goods. We implement the experiment on a mobile search platform that provides listings and reviews for an archetypal experience good, restaurants. In collaboration with the platform, we randomize about 200,000 users in 13 Asian cities into exposure of ads for about 600+ local restaurants. Within the exposure group, we randomly vary the disclosure to the consumer of whether a restaurant’s listing is a paid-ad. This enables isolating the effect on outcomes of a user knowing that a listing is sponsored — a pure signaling effect.
We find that this disclosure increases calls to the restaurant by 77%, holding fixed all other attributes of the ad. The disclosure effect is higher when the consumer uses the platform away from his typical city of search, when the uncertainty about restaurant quality is larger, and for restaurants that have received fewer ratings in the past. On the supply side, newer, higher rated and more popular restaurants are found to advertise more on the platform; and ratings of those that advertised during the experiment are found to be higher two years later. Taken together, we interpret these results as consistent with a signaling equilibrium in which ads serve as implicit signals that enhance the appeal of the advertised restaurants to consumers. Both consumers and advertisers seem to benefit from the signaling. Consumers shift choices towards restaurants that are better rated (at baseline) in the disclosure group compared to the no disclosure group, and advertisers gain from the improved outcomes induced by disclosure.