Low quality as a signal of high quality

Matthew T. Clements

No 2010-20, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: If a product has two dimensions of quality, one observable and one not, a firm can use observable quality as a signal of unobservable quality. The correlation between consumers' valuation of high quality in each dimension is a key determinant of the feasibility of such signaling. A firm may use price alone as a signal, or price and quality together. Both signals tend to be used when the market is very uninformed, whereas price signaling alone tends to be used when the market is moderately informed. If high observable quality is inexpensive to provide, then it cannot signal high unobservable quality, and low observable quality is always an indication that unobservable quality is high.

Keywords: Signaling; quality (search for similar items in EconPapers)
JEL-codes: D82 L15 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-com, nep-cta and nep-ind
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201020

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