We analyze a firm's optimal communication strategy when dissipative advertising can
be used as a signal of unobserved quality for an experience good, consumers share
experiences via word of mouth, and word of mouth can be biased. We study the
impact of two distinct empirically documented behavioral biases in word of mouth:
negativity and positivity. In terms of the first of these biases, a priori, one might
expect that with more negative opinions being shared, it should be easier for a low
quality firm to be exposed and hence a high quality firm may need a smaller
investment to separate itself in the eyes of rational consumers. Surprisingly, we show
that with more negativity bias, a high quality firm becomes more aggressive in
signaling its quality. This is because when negative word of mouth is prevalent and
consumers hear about a negative experience, they are more likely to be forgiving while
updating their quality beliefs. This yields important benefits to a low quality firm, and
as a consequence, to effectively achieve separation and prevent the low type from
mimicking, a high quality firm needs to increase its advertising spending. Such firm
behavior crucially relies on followers being aware of the existence and magnitude of
this bias; and is reversed otherwise. Similar results hold for positivity bias, when
biases arise due to under-reporting, and when a firm can rely on prices to signal
quality to consumers along with advertising. Overall, our analysis suggests that as bias
in word of mouth increases, it is optimal for a high quality firm to shift to a more
aggressive communication strategy.