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Consumer Feelings and Equilibrium Product Quality

  • Ganesh Iyer
  • Dmitri Kuksov
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    "This paper considers the possibility that a firm can invest not only in the true product quality, but also in activities such as merchandizing and store atmospherics that influence consumer perception of the product quality. Consumers make their purchase decisions based on the signal (perception) of quality they experience, where the signal is influenced by both the true product quality valued by the consumer and the affect of the consumer at the time of the signal formation. In this situation, a firm finds it optimal to invest in both product quality and in variables inducing affect, even though rational consumers, in equilibrium, correctly solve back for the true product quality. We uncover an asymmetry in the effects of the cost of producing quality and the cost of inducing affect. As a firm's cost of quality decreases, the firm will find it optimal to invest more both in the true quality and in the affect inducement, even if it does not have a lower cost of inducing affect. Conversely, if a firm finds it easier to induce affect, then the product quality decreases but affect-inducing activities increase." Copyright (c) 2010, The Author(s) Journal Compilation (c) 2010 Wiley Periodicals, Inc..

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    Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

    Volume (Year): 19 (2010)
    Issue (Month): 1 (03)
    Pages: 137-168

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    Handle: RePEc:bla:jemstr:v:19:y:2010:i:1:p:137-168
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