Consumer deliberation and quality signaling

Liang Guo () and Yue Wu ()
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Liang Guo: Chinese University of Hong Kong
Yue Wu: University of Pittsburgh

Quantitative Marketing and Economics (QME), 2016, vol. 14, issue 3, No 5, 233-269

Abstract: Abstract Consumers are often uncertain about their product valuation before purchase. They may bear the uncertainty and purchase the product without deliberation. Alternatively, consumers can incur a deliberation cost to find out their true valuation and then make their purchase decision. This paper proposes that consumer deliberation about product valuation can be an endogenous mechanism to enable credible quality signaling. We demonstrate this point in a simple setup in which product quality influences the probability that the product has high valuation. We show that with endogenous deliberation there may exist a unique separating equilibrium in which the high-quality firm induces consumer deliberation by setting a high price whereas the low-quality firm prevents deliberation by charging a low price. Compared to the case of complete information, the price of the high-quality firm can be distorted upward to facilitate consumer deliberation, or distorted downward to avoid the low-quality firm’s imitation. In an extension we show that dissipative advertising can facilitate quality signaling. The high-quality firm can utilize advertising spending to avert imitation from the low-quality firm without distorting price downward, earning a higher profit than that without advertising. However, advertising mitigates the distortion at the expense of consumer surplus and social welfare.

Keywords: Deliberation; Signaling; Dissipative advertising (search for similar items in EconPapers)
JEL-codes: D82 D83 L15 M3 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11129-016-9174-5

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