Familiarity Breeds Complexity: The Impact of Brand Loyalty on E-Commerce Advertising and Promotion Decisions

This study investigates the impact of consumers' brand loyalty on sellers' promotional and advertising strategies on China's leading e-commerce platform, Taobao. Utilizing a unique dataset in 2013, the research examines how sellers adjust their behaviors in response to the proportion of familiar consumers, a direct measure of loyalty. The study extends Agrawal's (1996) game-theoretical framework, testing the hypothesis that seller with smaller proportion of loyal consumers increase promotional frequency and advertising spending as the loyalty size increase. The research innovatively addresses the challenge of reverse causality by using the platform algorithm as an instrumental variable. Empirical findings support the hypotheses, providing new insights into the relationship between brand loyalty and seller behavior in e-commerce. The paper contributes to the literature on firm responses to consumer loyalty, offering practical implications for marketing strategies in digital marketplaces.