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Price as a Signal of Product Quality: Some Experimental Evidence

Listed author(s):
  • Mastrobuoni, Giovanni
  • Peracchi, Franco
  • Tetenov, Aleksey

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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Article provided by Cambridge University Press in its journal Journal of Wine Economics.

Volume (Year): 9 (2014)
Issue (Month): 02 (August)
Pages: 135-152

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Handle: RePEc:cup:jwecon:v:9:y:2014:i:02:p:135-152_00
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  1. 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.
  2. Tibor Scitovszky, 1944. "Some Consequences of the Habit of Judging Quality by Price," Review of Economic Studies, Oxford University Press, vol. 12(2), pages 100-105.
  3. Ali, Héla Hadj & Lecocq, Sébastien & Visser, Michael, 2010. "The Impact of Gurus: Parker Grades and en primeur Wine Prices," Journal of Wine Economics, Cambridge University Press, vol. 5(01), pages 22-39, March.
  4. 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.
  5. 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.
  6. Ashenfelter, Orley, 2010. "Predicting the Quality and Prices of Bordeaux Wine," Journal of Wine Economics, Cambridge University Press, vol. 5(01), pages 40-52, March.
  7. 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 170-199, October.
  8. Gerard J. Tellis & Birger Wernerfelt, 1987. "Competitive Price and Quality Under Asymmetric Information," Marketing Science, INFORMS, vol. 6(3), pages 240-253.
  9. 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.
  10. Asher Wolinsky, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 647-658.
  11. Michael Spence, 1976. "Symposium: The Economics of Information: Informational Aspects of Market Structure: An Introduction," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 591-597.
  12. Min Ding & Rajdeep Grewal & John Liechty, 2005. "Incentive-aligned conjoint analysis," Framed Field Experiments 00139, The Field Experiments Website.
  13. 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.
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