Indexing Product Quality: Issues, Theory, and Results

Abstract

Jn Concept of Quality and the Efficiency of Markets for Consumer Products, Hjorth-Andersen (1984) strongly condemns the use of overall productquality rankings, such as those published by Consumer Reports, as a basis for scientific research. His primary criticism is that creating an index of quality as a weighted average of subscores is usually misleading. He claims that this averaging process is unjustified except for brands that occupy approximately the same rank position on each attribute. This article reviews Hjorth-Andersen's arguments and identifies several important related questions on the use of published quality ratings in academic research. Statistical theory is developed to demonstrate that Hjorth-Andersen's conclusions are limited, and to examine the precise conditions under which his conclusions hold. Empirical evidence is presented that reveals the statistical frequency in real markets of the logical conditions deduced using our theory. Our conclusions differ significantly from those drawn by HjorthAndersen. A debate about the efficacy of quality indices is relevant not only to academic research but also to consumer welfare and strategic marketing planning. Consumer welfare and choice is affected by published quality ratings (Archibald, Haulman, and Moody 1983; Beales et al. 1981; Thorelli and Thorelli 1977). Commercial importance is evident from the widespread distribution of magazines like Consumer Reports. The consumer testing movement, started in 1927 by Chase and Schlink, has spread to agencies in more than 50 nations. These agencies are members of the International Organization of Consumers Unions (IOCU), and the combined circulation of their magazines is in the millions. Published quality ratings also influence academic research: our literature review' identified more than 30 studies that use objective quality ratings as data from which to draw inferences about price versus quality tradeoffs, advertising versus quality interactions, price versus quality changes over product life cycles, brand switching, market efficiency, and rational consumer judgments. Since this review concentrated on the marketing and economics literature, it is likely that the role of published quality ratings in academic research has been underestimated. In any case, academic researchers can and should assist product testing agencies in understanding sources of potential error in their quality scales. Strategic research, such as that conducted by the Strategic Planning Institute at Harvard University, has focused management attention on the influence of product quality on market performance measures like market share and rate-of-return on investment. For example, Phillips, Chang, and Buzzell (1983) indicate that product quality influences a firm's market share directly and its rate-of-return on investment indirectly through market share (see also Day 1986; Farris and Reibstein 1979; Urban et al. 1984). It is important that future research define coherently and measure accurately the construct of quality.