Discussion Paper

No. 2010-20 | July 20, 2010
Low Quality as a Signal of High Quality

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.

JEL Classification

D82 L15

Cite As

Matthew T. Clements (2010). Low Quality as a Signal of High Quality. Economics Discussion Papers, No 2010-20, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2010-20

Assessment



Comments and Questions


Anonymous - Referee Report 1
August 26, 2010 - 11:50

See attached file


Matthew T. Clements - Response to Referee Report 1
September 28, 2010 - 10:33

See attached file


Anonymous - Referee Report 2
October 18, 2010 - 16:34

See attached file


Matthew T. Clements - Reply to Referee Report 2
November 04, 2010 - 09:35

See attached file


Anonymous - Associate Editor´s Decision
April 04, 2011 - 11:54

For the sake of completeness we have just attached the associate editor´s decision on the discussion paper:

I would like Matthew Clements to write a revised version of his paper, which basically would integrate most of the replies he gave to the referees. More precisely, here are the issues ...[more]

... that the author should address in the revised version:

1. Explain better why the beer and wine examples fit his story. When reading the paper, I shared the concerns of the two referees but the author has now convinced me with his detailed answers. So, I think that all readers would appreciate to see these detailed answers in the introduction of the paper.

2. Provide a formal definition of the equilibrium concept and briefly discuss the choice of refinement criteria. This is something that is asked by referee #1 and I agree with him/her.

3. Discuss the assumptions about the distribution of willingness-to-pay. Both referees raise some issues about that; I think that the author's replies are sufficient and I would like to see them in the text (a footnote should suffice).

4. Clarify the notation (as asked by referee #2).