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Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Friday, December 14, 2012

Price as a signal of product quality: some experimental evidence

Posted by D. Daniel Sokol

Giovanni Mastrobuoni Franco Peracchi Aleksey Tetenov describe Price as a signal of product quality: some experimental evidence.

ABSTRACT: We study the determinants of the choice between wines in wine tasting experiments where about 200 nonprofessional tasters were asked to indicate which one of the tasted wines they preferred and which one they would buy. In addition to actually tasting several wines, which differ in terms of their intrinsic quality, tasters were randomly given fictitious information about their price and the environment where the grapes were grown and the wines produced. We exploit the randomness of these signals to weigh their importance relative to the intrinsic quality of the wine using a random utility model. The model combines separate information on which wine the tasters prefer and which one they would buy to identify the signaling value of price. We are able to separate the positive signaling effect of price from its negative effect through the budget constraint. Consistent with Wolinsky (1983) and Milgrom and Roberts (1986), we f! ind that tasters use price as a signal about the quality of the product. The signaling effect is strongly non-linear and depends on the tasters' experience.

http://lawprofessors.typepad.com/antitrustprof_blog/2012/12/price-as-a-signal-of-product-quality-some-experimental-evidence-.html

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