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Signaling Quality Through Specialization

Author

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  • Ajay Kalra

    () (Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Shibo Li

    () (Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

Abstract

Firms frequently position themselves as specialists. An implication of specialization is that the firm has forgone alternative opportunities. In the context of effort-intensive categories, we show that a firm can signal quality to consumers by specializing. In the model, a firm must decide to provide one service offering or to market two services. By entering a single category, the firm incurs an opportunity cost of not entering the secondary profitable category, but may attain reduced costs. The net cost is the signaling cost that a high-quality type firm incurs to signal quality over a low-quality type firm. We show that in homogenous markets, a high-quality type firm signals its high-quality type by specializing in one category. When consumers are heterogeneous, the firm can signal its high-quality type by using prices alone in both the primary and secondary categories. However, specialization can be used as a secondary signal of quality in heterogeneous markets because of lower signaling costs. We also find that signaling using specialization is more likely in the presence of competition.

Suggested Citation

  • Ajay Kalra & Shibo Li, 2008. "Signaling Quality Through Specialization," Marketing Science, INFORMS, vol. 27(2), pages 168-184, 03-04.
  • Handle: RePEc:inm:ormksc:v:27:y:2008:i:2:p:168-184
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    File URL: http://dx.doi.org/10.1287/mksc.1070.0300
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      by Jason Barr in Building the skyline on 2018-03-08 17:11:18

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    3. Luís Cabral, 2012. "Lock in and switch: Asymmetric information and new product diffusion," Quantitative Marketing and Economics (QME), Springer, vol. 10(3), pages 375-392, September.
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    5. Archishman Chakraborty & Rick Harbaugh, 2012. "Persuasive Puffery," Working Papers 2012-05, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
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    Keywords

    specialization; signaling;

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