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Price as a signal of product quality: Some experimental evidence

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  • Giovanni Mastrobuoni

    (Collegio Carlo Alberto and CeRP)

  • Franco Peracchi

    (Tor Vergata University and EIEF)

  • Aleksey Tetenov

    (Collegio Carlo Alberto)

Abstract

We separate the budgetary and non-budgetary effects of price on demand using choice data from wine tasting experiments in which consumers tasted wines of different quality accompanied by fictitious price information. The non-budgetary effect is present and nonlinear: it is strongly positive between 3 and 5 euro, and undetectable between 5 and 8 euro. We find a similar nonlinear price-quality relationship in a large sample of wine ratings from the same price segment, supporting the hypothesis that consumer 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 Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1214.

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Length: 28 pages
Date of creation: 2012
Date of revision: Oct 2012
Handle: RePEc:eie:wpaper:1214

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  1. Heffetz, Ori & Shayo, Moses, 2009. "How Large Are Non-Budget-Constraint Effects Of Prices On Demand?," Working Papers 53882, American Association of Wine Economists.
  2. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
  3. 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.
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  5. Min Ding & Rajdeep Grewal & John Liechty, 2005. "Incentive-aligned conjoint analysis," Framed Field Experiments 00139, The Field Experiments Website.
  6. 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.
  7. Hadj Ali H. & Lecocq S. & Visser M., 2007. "The impact of gurus: Parker grades and en primeur wine prices¤," Working Papers ERMES 0718, ERMES, University Paris 2.
  8. Orley Ashenfelter, 2008. "Predicting the Quality and Prices of Bordeaux Wine," Economic Journal, Royal Economic Society, vol. 118(529), pages F174-F184, 06.
  9. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 647-58, October.
  10. Gerard J. Tellis & Birger Wernerfelt, 1987. "Competitive Price and Quality Under Asymmetric Information," Marketing Science, INFORMS, vol. 6(3), pages 240-253.
  11. Spence, Michael, 1976. "Informational Aspects of Market Structure: An Introduction," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 591-97, November.
  12. 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.
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