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What is in a price? Evidence on quality signaling for experience goods

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  • Rroshi, Daniela

  • Weichselbaumer, Michael

Abstract

We study the effect of quality disclosure on prices using quality tests released by the main consumer protection agency in Germany. Both durable and non-durable consumer products are covered, representing about 5 percent of weighted expenditures for all products in the German CPI. Cross-section results of the price-quality relation before quality disclosure show that higher prices are positively correlated with higher quality for durable goods, and negatively correlated for non-durable goods; both results are in line with theoretical models of price signaling. In the dynamic analysis, we employ a RD-type approach around publication of the quality evaluation for identification. Results show a positive effect of quality disclosure on prices for high quality durable products and a negative effect for low quality products suggesting that the information improves matching. Opposite results hold for non-durable products. Survival estimates show that products of low quality leave the market earlier.

Suggested Citation

  • Rroshi, Daniela & Weichselbaumer, Michael, 2021. "What is in a price? Evidence on quality signaling for experience goods," Department of Economics Working Paper Series 311, WU Vienna University of Economics and Business.
    • Handle: RePEc:wiw:wus005:8061
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    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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