Prices as Signals of Product Quality

Wolinsky, Asher
October 1983
Review of Economic Studies;Oct83, Vol. 50 Issue 4, p647
Academic Journal
This paper is concerned with the provision of quality in markets in which consumers have only imperfect information. The analysis focuses on a market for a product that can be produced at different quality levels. All consumers prefer higher to lower quality, but they may differ in their willingness to pay for quality. Producers can produce any quality they like, but higher qualities are more costly to produce. The information in this market is imperfect in the sense that the exact quality chosen by a firm is known only to the firm itself; some information about the quality of a firm's product will, however, reach its potential customers, even if they do not make any special effort to acquire it. Within the framework suggested here, two conclusions are drawn. First, prices may serve as signals which exactly differentiate the available quality levels. That is, there exists a fulfilled-expectations equilibrium at which each price signals a unique quality level Second, the price-signals are not arbitrary. Each price-signal exceeds the marginal cost of producing the quality it signals Such a mark-up depends on the nature of the product-specific information received by consumers--the poorer the information, the higher the mark-up.


Related Articles

  • Welfare Measures when Agents can Learn: A Unifying Theory. Zhao, Jinhua; Kling, Catherine L. // Economic Journal;Oct2009, Vol. 119 Issue 540, p1560 

    We extend Graham's (1981) welfare analysis under uncertainty to a dynamic environment where the agent can delay and obtain information. The dynamic willingness to pay locus unifies the concepts of option price, dynamic WTP, commitment costs and quasi-option value. Option price (dynamic WTP)...

  • The 24-Hour Customer. Ott, Adrian C. // 24-Hour Customer;11/17/2014, p1 

    In The 24-Hour Customer, Adrian C. Ott explores how companies that understand the value of time and build their products and services around their customers’ willingness to invest precious time and attention are gaining competitive traction, and also developing new offerings in previously...

  • Consumers 'Vote' on Certified Pork. Vansickle, Joe // National Hog Farmer;7/15/2006, Vol. 51 Issue 7, p30 

    The article reports on the survey concerning the responses of consumers whether to compensate more for a certified pork chop in the retail counter in the U.S. The survey targets primary household shoppers. This reveals that 16 percent of pork consumers shows more willingness to pay for products...

  • It Is Not Just About Competition with “Free”: Differences Between Content Formats in Consumer Preferences and Willingness to Pay. Berger, Benedikt; Matt, Christian; Steininger, Dennis M.; Hess, Thomas // Journal of Management Information Systems;2015, Vol. 32 Issue 3, p105 

    While consumption of content in offline formats continues to decline, many providers are still struggling to monetize their content online, because consumers’ willingness to pay (WTP) for content in online formats is low. The availability of free content on the Internet is often...

  • The dual role of price: decomposing consumers' reactions to price. Vöckner, Franziska // Journal of the Academy of Marketing Science;Fall2008, Vol. 36 Issue 3, p359 

    The article discusses product pricing strategies, examining the role the price of a product plays in choices made by consumers. Topics include the sacrifice effect of price, wherein consumers decide how much money they are willing to sacrifice in order to meet their consumption needs, and the...

  • Creating Some Urgency, Or 'Hurry Up And Buy.'. Gitomer, Jeffrey // Grand Rapids Business Journal;7/9/2007, Vol. 25 Issue 28, p33 

    The article focuses on several factors that influence people to buy. It states that customers feel that if they buy, they will make a significant gain or keep someone else from getting it. It notes that people will surely buy the things they want badly. It adds that customers tend to buy the...

  • THE TWO SIDES OF JOE JONES. Hackett, Otis // Motorcycle Product News;Jun2010, Vol. 36 Issue 6, p30 

    The article presents information on the different types of customers. It says that there are two types of customers, the customers who are in need and the customer who just want to buy the product. It mentions that the customers who just want the product are usually the customer who can afford...

  • Negative Values in Vickrey Auctions. Parkhurst, Gregory M.; Shogren, Jason F.; Dickinson, David L. // American Journal of Agricultural Economics;Feb2004, Vol. 86 Issue 1, p222 

    Some people assign negative values for new products sold on laboratory auction blocks (i.e., irradiated meat). We explore bidding behavior in two Vickrey auctions when people have positive- and negative-induced values for the good. Aggregate bidding in the second-price auction is precise but...

  • Untitled.  // New Yorker;10/14/1961, Vol. 37 Issue 35, p201 

    The article focuses on a study made by the U-M Survey Research Center regarding consumer spending. The study, conducted for 10 years, showed that purchases made by consumers depended on two factors related to financial and behavioral aspects. Consumers' income or financial capability was one...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics