Consumer Feelings and Equilibrium Product Quality

32 Pages Posted: 26 Jan 2010

See all articles by Ganesh Iyer

Ganesh Iyer

University of California, Berkeley - Marketing Group

Dmitri Kuksov

Washington University in St. Louis - John M. Olin Business School

Abstract

Under competition, we find that the firm investing more in quality also invests more in affect creation. An implication of this is that in a competitive environment, consumers can rationally associate an up-lifting store atmosphere, affect inducing merchandizing, or mood-creating communication with high quality products even when the firm has no need to signal their private cost of quality information, and when there is no consumption externality of the affect. We also analyze the case in which firms might have different costs and consumers are uncertain about the costs incurred by a given firm. Here again we show that the perceived quality production is positively correlated with both the true quality and the affect inducing activities.This paper considers the possibility that a firm can invest not only in the true product quality, but also in activities such as merchandizing and store atmospherics that influence consumer perception of the product quality. Consumers make their purchase decisions based on the signal (perception) of quality they experience, where the signal is influenced by both the true product quality valued by the consumer and the affect of the consumer at the time of the signal formation. In this situation, a firm finds it optimal to invest in both product quality and in variables inducing affect, even though rational consumers, in equilibrium, correctly solve back for the true product quality. We uncover an asymmetry in the effects of the cost of producing quality and the cost of inducing affect. As a firm's cost of quality decreases, the firm will find it optimal to invest more both in the true quality and in the affect inducement, even if it does not have a lower cost of inducing affect. Conversely, if a firm finds it easier to induce affect, then the product quality decreases but affect-inducing activities increase.

Under competition, we find that the firm investing more in quality also invests more in affect creation. An implication of this is that in a competitive environment, consumers can rationally associate an up-lifting store atmosphere, affect inducing merchandizing, or mood-creating communication with high quality products even when the firm has no need to signal their private cost of quality information, and when there is no consumption externality of the affect. We also analyze the case in which firms might have different costs and consumers are uncertain about the costs incurred by a given firm. Here again we show that the perceived quality production is positively correlated with both the true quality and the affect inducing activities.

Suggested Citation

Iyer, Ganesh and Kuksov, Dmitri, Consumer Feelings and Equilibrium Product Quality. Journal of Economics & Management Strategy, Vol. 19, Issue 1, pp. 137-168, Spring 2010, Available at SSRN: https://ssrn.com/abstract=1542319 or http://dx.doi.org/10.1111/j.1530-9134.2009.00248.x

Ganesh Iyer

University of California, Berkeley - Marketing Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

Dmitri Kuksov

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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