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Signaling Quality Through Specialization

  • Ajay Kalra

    ()

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

  • Shibo Li

    ()

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

Registered author(s):

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.

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File URL: http://dx.doi.org/10.1287/mksc.1070.0300
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Article provided by INFORMS in its journal Marketing Science.

Volume (Year): 27 (2008)
Issue (Month): 2 (03-04)
Pages: 168-184

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Handle: RePEc:inm:ormksc:v:27:y:2008:i:2:p:168-184
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