Quality signaling and willingness-to-pay: an experimental assessment

Firms often use quality signals, such as a money-back guarantee or a reference price, designed to stimulate consumer demand for a product. This paper investigates the relative effects of the two common signaling tools on willingness-to-pay (WTP) elicitation for a familiar good in the absence of a brand establishment. Our novel field experiment design that combines a Becker-DeGroot-Marschak auction and a randomized controlled trial allows us to isolate the causal effect of signaling without facing hypothetical bias in the WTP elicitation. We find a positive signaling effect of the reference price and no linear effect of the money-back warranty contract on WTP. Using a piecewise linear regression approach, we identify the nonlinear moderating effect of consumers’ previous product experience and the boundary conditions associated with the signaling effect. Our findings advance the literature on quality signaling and provide insights to managers for effective resource allocations on signaling devices.