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Does Price Signal Quality? Strategic Implications of Price as a Signal of Quality for the Case of Genetically Modified Food

Author

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  • Hwang, Yun Jae
  • Roe, Brian E.
  • Teisl, Mario F.

Abstract

When products are differentiated and quality is highly subjective (e.g., fashion or art), novel (e.g., a new feature), or difficult to verify prior to purchase (e.g., credence attributes), consumers may turn to price as a signal of quality. Products containing genetically modified (GM) ingredients meet each of these criteria, i.e., GM ingredients are novel, their presence is difficult to verify, and their impact on subjective quality may be viewed differently across individuals with the same knowledge. We add to the limited empirical literature on consumers' use of price as a quality signal by testing for non-monotonicity of consumer demand in price for GM products using data collected from a nationally representative mail survey featuring several hypothetical product choice scenarios. We find mixed evidence across three products for non-monotonicity of demand in price and argue the results suggest that survey respondents use price as a signal of the quality of GM products for at least one of the three products investigated. Implications for firm strategy and regulation are discussed.

Suggested Citation

  • Hwang, Yun Jae & Roe, Brian E. & Teisl, Mario F., 2005. "Does Price Signal Quality? Strategic Implications of Price as a Signal of Quality for the Case of Genetically Modified Food," 2005 Annual meeting, July 24-27, Providence, RI 19509, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea05:19509
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    References listed on IDEAS

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    1. Pollak, Robert A, 1977. "Price Dependent Preferences," American Economic Review, American Economic Association, vol. 67(2), pages 64-75, March.
    2. Balasko, Yves, 2003. "Economies with price-dependent preferences," Journal of Economic Theory, Elsevier, vol. 109(2), pages 333-359, April.
    3. Jones, Philip & Hudson, John, 1996. "Signalling product quality: When is price relevant?," Journal of Economic Behavior & Organization, Elsevier, vol. 30(2), pages 257-266, August.
    4. Caves, Richard E. & Greene, David P., 1996. "Brands' quality levels, prices, and advertising outlays: empirical evidence on signals and information costs," International Journal of Industrial Organization, Elsevier, vol. 14(1), pages 29-52.
    5. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    6. 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.
    7. Hjorth-Andersen, Chr., 1991. "Quality indicators : In theory and in fact," European Economic Review, Elsevier, vol. 35(8), pages 1491-1505, December.
    8. Landon, Stuart & Smith, Constance, 1998. "Quality expectations, reputation, and price," MPRA Paper 9774, University Library of Munich, Germany.
    9. Alfredo Esposto, 1998. "Price, quality, and smoke signals," Applied Economics Letters, Taylor & Francis Journals, vol. 5(12), pages 801-803.
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    Cited by:

    1. Sengupta, Aditi, 2012. "Investment in cleaner technology and signaling distortions in a market with green consumers," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 468-480.
    2. Alfredo R. Paloyo, 2009. "Co-pay and Feel Okay: Evidence of Illusory Health Gains from a Health Insurance Reform," SOEPpapers on Multidisciplinary Panel Data Research 225, DIW Berlin, The German Socio-Economic Panel (SOEP).
    3. Aditi Sengupta, 2010. "Signaling environmental quality to green consumers and the incentive to invest in cleaner technology: Effect of environmental regulation," Departmental Working Papers 1001, Southern Methodist University, Department of Economics.
    4. Sengupta, Aditi, 2015. "Competitive investment in clean technology and uninformed green consumers," Journal of Environmental Economics and Management, Elsevier, vol. 71(C), pages 125-141.

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