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Quality Expectations, Reputation, and Price

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  • Stuart Landon
  • Constance E. Smith

Abstract

Although the theoretical literature on firm reputation is well developed, few empirical studies exist that quantify the importance of reputation effects. This paper estimates the impact on price of current product quality and reputation using data from the market for Bordeaux wine. A model is proposed in which price is a function of current quality and expected quality, where the latter depends on reputation. Equations determining price and expected quality are estimated jointly. The empirical findings show that the price premium associated with a better reputation far exceeds that associated with improvements in current quality. The impact of reputation on price is disaggregated into individual firm and collective (or group) reputation effects, and the significance and magnitude of these effects are compared. The results indicate that both types of reputation are important, and that in general, the market values collective reputation indicators only to the extent that they are useful predictors of product quality.

Suggested Citation

  • Stuart Landon & Constance E. Smith, 1998. "Quality Expectations, Reputation, and Price," Southern Economic Journal, John Wiley & Sons, vol. 64(3), pages 628-647, January.
    • Handle: RePEc:wly:soecon:v:64:y:1998:i:3:p:628-647
    DOI: 10.1002/j.2325-8012.1998.tb00084.x
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    More about this item

    JEL classification:

    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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