Low Quality as a Signal of High Quality

25 Pages Posted: 18 Dec 2010

Multiple version iconThere are 3 versions of this paper

Date Written: 2010

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

JEL Classification: D82, L15

Suggested Citation

Clements, Matthew T., Low Quality as a Signal of High Quality (2010). Economics Discussion Paper No. 2010-20. Available at SSRN: https://ssrn.com/abstract=1726777 or http://dx.doi.org/10.2139/ssrn.1726777

Matthew T. Clements (Contact Author)

St. Edward's University ( email )

3001 South Congress Avenue
Austin, TX 78704
United States
(512) 428-1321 (Phone)

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