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Price as a signal of product quality: some experimental evidence

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  • Giovanni Mastrobuoni
  • Franco Peracchi
  • Aleksey Tetenov

Abstract

We use experimental data to disentangle signaling and budgetary effects of price on wine demand. The experimental design allow us to isolate in a simple and intuitive way the two effects. The signaling effect is present and nonlinear: it is strongly positive between EUR3 and EUR5, and undetectable between EUR5 and EUR8. We find a similar nonlinear price-quality relationship in a large sample of wine ratings from the same price segment, supporting the hypothesis that taster behavior in the experiment is consistent with rationally using prices as signals of quality. Price signals also have greater importance for inexperienced (young) consumers.

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Bibliographic Info

Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 268.

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Length: 26 pages
Date of creation: 2012
Date of revision: 2013
Handle: RePEc:cca:wpaper:268

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Keywords: Pricing; signaling; product quality; wine ratings;

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  1. Philippe Mahenc, 2004. "Influence of Informed Buyers in Markets Susceptible to the Lemons Problem," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(3), pages 649-659.
  2. HélaHadj Ali & Sébastien Lecocq & Michael Visser, 2008. "The Impact of Gurus: Parker Grades and "En Primeur" Wine Prices," Economic Journal, Royal Economic Society, vol. 118(529), pages F158-F173, 06.
  3. Ori Heffetz & Moses Shayo, 2009. "How Large Are Non-Budget-Constraint Effects of Prices on Demand?," American Economic Journal: Applied Economics, American Economic Association, vol. 1(4), pages 170-99, October.
  4. Ashenfelter, Orley, 2007. "Predicting the quality and prices of Bordeaux wines," Working Papers 37297, American Association of Wine Economists.
  5. Héla Hadj Ali & Céline Nauges, 2007. "The Pricing of Experience Goods: The Example of en primeur Wine," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(1), pages 91-103.
  6. Min Ding & Rajdeep Grewal & John Liechty, 2005. "Incentive-aligned conjoint analysis," Framed Field Experiments 00139, The Field Experiments Website.
  7. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  8. Spence, Michael, 1976. "Informational Aspects of Market Structure: An Introduction," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 591-97, November.
  9. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 647-58, October.
  10. Ippolito, Pauline M & Mathios, Alan D, 1995. "Information and Advertising: The Case of Fat Consumption in the United States," American Economic Review, American Economic Association, vol. 85(2), pages 91-95, May.
  11. Pauline M. Ippolito & Alan D. Mathios, 1990. "Information, Advertising and Health Choices: A Study of the Cereal Market," RAND Journal of Economics, The RAND Corporation, vol. 21(3), pages 459-480, Autumn.
  12. Gerard J. Tellis & Birger Wernerfelt, 1987. "Competitive Price and Quality Under Asymmetric Information," Marketing Science, INFORMS, vol. 6(3), pages 240-253.
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