Journal Article

No. 2011-5 | March 07, 2011
Low Quality as a Signal of High Quality PDF Icon

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

Citation

Matthew T. Clements (2011). Low Quality as a Signal of High Quality. Economics: The Open-Access, Open-Assessment E-Journal, 5 (2011-5): 1—22. http://dx.doi.org/10.5018/economics-ejournal.ja.2011-5

Assessment

Downloads: 3112 (Journalarticle: 2321, Discussionpaper: 791)
external link Search this article at Google Scholar



Comments and Questions