The “Reasonable Consumer” Standard for Product Labeling

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.

У статті запропоновано підходи до моделювання процесу контролю якості продукції на підприємствах машинобудівної галузі з метою оптимізації його результативності. Отримані результати дають можливість визначити профілі та тенденції стосовно якості продукції машинобудування, виявити пріоритети поліпшення її якості. Машинобудівному підприємству необхідно проводити моніторинг щодо задоволення споживачів, визначивши способи одержання цієї інформації, вчасно розробляти методи оцінювання та проводити аналіз отриманої інформації з метою задоволення потреб споживачів. Моделювання дає змогу вчасно виявити виникнення кризових явищ для кваліметричного оцінювання контролю якості виготовлення продукції машинобудівної галузі, відстежувати динаміку і тенденції змін, що відбуваються.

Online word-of-mouth (WOM) communication in the form of online product reviews, such as those provided by consumers that have previously purchased a product, has become a major information source for consumers and marketers about a product’s quality. The literature has thus used online product reviews to predict a product’s sales and future success, assuming that the average (mean) score of these reviews represents true product quality. However, using experimental and econometric data, this study empirically shows that single point estimation (e.g., the mean) may not be a sufficient predictor of true product quality due to under-reporting by consumers with moderate product reviews.To overcome this concern, this paper first tests the underlying distribution of online product reviews with secondary data from Amazon (www.amazon.com). The econometric results reveal that the reviews for the majority of the products have an asymmetric bimodal distribution. For these products, the mean of the online product reviews does not necessarily reveal the product’s true quality, resulting in misleading conclusions about the product’s future success. In contrast, results from a controlled experiment where all respondents reviewed a product show that their product reviews follow a unimodal (approximately normal) distribution. This confirms that consumers with extreme (positive or negative) views are more likely to review products than consumers with moderate views, resulting in a truncated sample.To identify when single point estimation can be used as a sufficient predictor considering the consumers’ incentive of leaving reviews, this paper develops an analytical model to derive the conditions of when the mean can serve as a valid proxy of a product’s true quality. Finally, we introduce a dual point estimation model using the lower and upper ends of the modal interval of the DIP test to predict true product quality, which is shown to be a superior predictor of future product sales versus the simple and weighted average. The paper concludes by discussing the study’s theoretical and managerial implications.

Peer ratings have become increasingly important sources of product information, particularly in markets for information goods. However, in spite of the increasing prevalence of this information, there are relatively few academic studies that analyze the impact of peer ratings on consumers transacting in “real-world” marketplaces. In this paper, we partner with a major telecommunications company to analyze the impact of peer ratings in a real-world video-on-demand market where consumer participation is organic and where movies are costly and well known to consumers. After experimentally changing the initial conditions of product information displayed to consumers, we find that, consistent with the prior literature, peer ratings influence consumer behavior independently from underlying product quality. However, we also find that, in contrast to the prior literature, there is little evidence of long-term bias as a result of herding effects, at least in our setting. Specifically, when movies are artificially promoted or demoted in peer rating lists, subsequent reviews cause them to return to their true quality position relatively quickly. One explanation for this difference is that consumers in our empirical setting likely had more outside information about the true quality of the products they were evaluating than did consumers in the studies reported in prior literature. Although tentative, this explanation suggests that in real-world marketplaces where consumers have sufficient access to outside information about true product quality, peer ratings may be more robust to herding effects and thus provide more reliable signals of true product quality than previously thought. This paper was accepted by Lorin M. Hitt, information systems.

Peer ratings have become increasingly important sources of product information, particularly in markets for information goods. However, in spite of the increasing prevalence of this information, there are relatively few academic studies that analyze the impact of peer ratings on consumers transacting in “real-world” marketplaces. In this paper, we partner with a major telecommunications company to analyze the impact of peer ratings in a real-world video-on-demand market where consumer participation is organic and where movies are costly and well known to consumers. After experimentally changing the initial conditions of product information displayed to consumers, we find that, consistent with the prior literature, peer ratings influence consumer behavior independently from underlying product quality. However, we also find that, in contrast to the prior literature, there is little evidence of long-term bias as a result of herding effects, at least in our setting. Specifically, when movies are artificially promoted or demoted in peer rating lists, subsequent reviews cause them to return to their true quality position relatively quickly. One explanation for this difference is that consumers in our empirical setting likely had more outside information about the true quality of the products they were evaluating than did consumers in the studies reported in prior literature. Although tentative, this explanation suggests that in real-world marketplaces where consumers have sufficient access to outside information about true product quality, peer ratings may be more robust to herding effects and thus provide more reliable signals of true product quality than previously thought.

Unraveling the cheap talk’s informativeness of product quality in supply chains: A lying aversion perspective

The objective of this paper is to investigate the firm's optimal advertising and pricing strategies when introducing a new product. We extend the existing signaling literature on advertising spending and price by constructing a model in which advertising is used both to raise awareness about the product and to signal its quality. By comparing the complete information game and the incomplete information game, we find that the high-quality firm will reduce advertising spending and increase price from their respective complete information levels. In the separating equilibrium, the high-quality firm will actually spend less on advertising than the low-quality firm, resulting in a negative correlation between product quality and advertising spending. What sets our analysis apart from previous studies is that we consider advertising spending not only as a signaling device but also as an informational device. When advertising spending is just a signaling device, it is purely a dissipative expense. It can be an effective signal of quality because only the high-quality firm can afford it; thus, consumers can infer the product's quality by its advertising spending. In this case, advertising spending and product quality are positively correlated. However, when advertising also serves the purpose of raising awareness, it endogenizes the size of the market for the firm, so it is not just a dissipative expense any more. Consider the low-quality firm's mimicking strategy in this case. When the low-quality firm is believed to be a highquality one, it can charge a much higher price than if its true quality were known. Given that its marginal cost is lower than the high-quality firm's, its profit margin will be much larger in mimicry than in revealing its true quality. Indeed, its profit margin will be even greater than the high-quality firm's. Therefore, the low-quality firm in mimicry has a strong incentive to increase its advertising spending from its optimal level when its true quality is known. To deter the low-quality firm's mimicking tendency, the high-quality firm should decrease its advertising spending so that mimicry is not as appealing to the low-quality firm as revealing its true quality. Indeed, the high-quality firm should reduce its advertising spending so much that it advertises less than the low-quality firm in equilibrium Many have interpreted signaling as “burning money” or “throwing money down the drain.” In the case of advertising, the claim is that its purpose is simply to show consumers that the firm can afford to squander money on advertising to signal its quality. Hence, the advertising content need not be informative. However, our results show that simply “burning money” is not enough to signal quality. How the money is burned is also important. When advertising raises awareness as well as signals quality, “saving money” rather than “burning money” is the correct signaling approach, although ultimately the high-quality firm will sacrifice some profit by reducing its market size. The intuition behind this result is that when information is incomplete, the high-quality firm cannot fully exploit its advantages. Whenever its advantages in quality and/or marginal costs are lessened, a firm will want to spend less on advertising.

Motivated by the phenomenon that some retailers with high-end brand images, such as Neiman Marcus and Bergdorf Goodman, prefer to hinder consumers from sharing information through online reviews, we study an online retailer's strategy of hindering or facilitating consumer information sharing in a supply chain and its dependence on the retailer's brand image and target consumer segment. To capture the dynamics of consumer information sharing, we employ a two-period model in which consumers, with heterogeneous valuation of a product, arriving in the first period make purchase decisions based on the retailer's brand image and can find out the product quality only after their purchase, and consumers arriving in the second period learn about the product quality from the first-period consumers if the online retailer's website facilitates information sharing among consumers. We find that a high-end retailer is likely to benefit from hindering information sharing among consumers because hindering information enables the high-end retailer to induce all consumers to purchase. Such a target strategy prevents the manufacturer from extracting all of the profit from the retailer, as compared to a target strategy where the retailer only sells to consumers with high levels of willingness to pay. We also show that, interestingly, the retailer's dominant consumer information sharing strategy often benefits the supply chain when the product quality is exogenously determined. However, when the product quality is endogenous, the retailer's dominant consumer information sharing strategy can hurt the supply chain. Surprisingly, deterring consumers from learning about a product's true quality may generate more consumer surplus. Our work sheds light on the retailer's information sharing strategy by taking into account the target consumer segment as well as the interaction with upstream manufacturers.

As a digital version of word-of-mouth, online review has become a major information source for consumers and has very important implications for a wide range of management activities. While some researchers focus their studies on the impact of online product review on sales, an important assumption remains unexamined, that is, can online product review reveal the true quality of the product? To test the validity of this key assumption, this paper first empirically tests the underlying distribution of online reviews with data from Amazon. The results show that 53% of the products have a bimodal and non-normal distribution. For these products, the average score does not necessarily reveal the product's true quality and may provide misleading recommendations. Then this paper derives an analytical model to explain when the mean can serve as a valid representation of a product's true quality, and discusses its implication on marketing practices.

Bank financing is a traditional source of capital for small businesses, whereas crowdfunding has recently emerged as an alternative fund-raising solution to support innovative ideas and entrepreneurial ventures. We investigate the equilibrium relationship between a firm's funding choice and word-of-mouth (WOM) communication among consumers, and its consequent impact on product quality, consumer surplus, and social welfare. Depending on what kind of information is transferred via social interactions, we look at two types of WOM: informative (where WOM expands awareness of the product in the retail market) and learning (where WOM helps consumers to learn the product's true quality in the crowdfunding market). We find that more active WOM communication always benefits the firm and favors crowdfunding adoption. However, product quality may either increase or decrease as WOM expands. More importantly, consumer surplus and social welfare always increase in informative WOM, but may decrease in learning WOM. Lastly, expansion of the crowdfunding platform (i.e., attracting more consumers as platform users) always enhances the value of crowdfunding under informative WOM, but it could discourage crowdfunding adoption under learning WOM.

Empirical studies examining responses to new product entries come to the puzzling conclusion that, in general, an incumbent reacts to a new entrant after a significant delay. Even easy-to-implement price cuts are observed after significant lag following entry. These findings seem to contradict the existing literature that either implicitly assumes or strongly advocates immediate defensive responses to limit competitive encroachment. When a competing firm enters the market, consumers may be uncertain about the entering firm's product quality. The incumbent firm (through rigorous tests) may fully know the entrant's quality. Suppose the incumbent aggressively lowers price. This may cause the consumers to wonder if indeed the entrant's quality is high. In other words, an incumbent's reaction may cause the consumers to make inferences about the entrant's quality. Such strategic implications of the incumbent's reactions have to be carefully analyzed before determining the optimal response by the incumbent. In this paper, we propose a conceptual framework for understanding differences in the magnitude and timing of incumbents' responses to competitive entries. We consider a model in which a monopolist incumbent firm faces competitive entry. The incumbent firm knows the true quality of the entrant with certainty. Although consumers are aware of the incumbent's product quality through their prior experience, they are initially uncertain of the entrant's product quality. In such a situation, a high-quality entrant has the incentive to signal her true quality through her strategic price choice. However, the uncertainty about the entrant's quality is favorable to the incumbent in the sense that consumers believe with a high probability that the entrant's quality is low. As a result, the strategic incentives facing the incumbent and the entrant oppose each other. While the entrant wants to signal her high quality, the incumbent wants to prevent her from doing so. We demonstrate that one way the incumbent can prevent the quality signaling is to select a higher than his optimal competitive (duopoly) price. In other words, the incumbent can prevent or “jam” the entrant's quality signaling by choosing a price higher than his optimal competitive price when consumers are fully informed about the entrant's true quality. Though the signal-jamming price is lower than the monopoly price, the price is substantially higher than the competitive price. This marginal reduction in the incumbent's price from the pre-entry monopolistic price represents a muted or lack of response by the incumbent to the competitive entry. However, once the entrant's quality gets revealed in subsequent periods through consumer usage and word of mouth, the entrant has no incentive to engage in quality signaling and the incumbent has no incentive to jam it. Therefore, the market reverts to the complete-information competitive prices, and the incumbent lowers his price considerably. This temporal pattern of muted price reduction in the first period followed by a sharp price reduction in the second period corresponds to a delayed defensive reaction in our model. Although the empirical studies suggest that the delayed reaction may arise due to factors such as managerial inertia or indecision, we demonstrate that such a behavior is indeed an optimal strategy for a profit-maximizing firm. Thus, our model reconciles empirical results with the equilibrium outcome of a strategic analytical framework. Furthermore, in an experimental setting, we test the predictive power of our framework and establish that consumers indeed form conjectures about the entrant's quality based on the incumbent's reactions. In the first experimental study, we find strong support for the notion that the incumbent's price reaction may indicate entrant's quality. In a follow-up study, we observe that whenever the incumbent lowers prices, respondents judge the quality of the entrant to be higher as compared to the case when prices are the same or increased. The managerial implication of this paper is that well-established incumbent firms should be cautious in the implementation of their defensive responses to product introductions of uncertain quality by competitors. Of particular concern are situations where the reactions are easily observable by consumers. A strong reaction may suggest that the incumbent takes the competitive threat seriously, leading consumers to believe in the quality of the competitor's product.

Unfair commercial practices in the food industry can include actions and practices by traders or producers that mislead consumers about the true characteristics, quality, or price of products. For example, if a producer does not accurately and transparently list the composition of products, or if advertisements contain false or misleading information about products, or if inappropriate product quality is concealed, or if promised benefits of products are not realised, or if consumers are unfairly persuaded to purchase products. It is important to note that all traders and producers must comply with consumer protection rules. If any unfair commercial practices are observed, consumers can legitimately file a complaint with the Consumer Protection Authority or the Hungarian Competition Authority. Unfair commercial practices can be a serious problem for consumers as they mislead them about the true characteristics of products, making it difficult to make informed purchasing decisions. Therefore, it is important for consumers to be informed about the true composition and quality of products in order to avoid falling victim to unfair commercial practices. Through various legal cases, I demonstrate how important it is for consumers to be fully informed and aware of their rights. Additionally, I illustrate how investigating different complaints can have an impact on preventing unfair commercial practices.

This study aims to evaluate the impact of Product Quality and Service Quality on Customer Satisfaction at Sule Tailor. The evaluation of customer and production data over the last three months indicates a decline, triggering the need for more intensive investigation into the elements contributing to customer satisfaction. In this context, a more comprehensive understanding of marketing management, Product Quality, and Service Quality becomes the focus. This study adopts a descriptive verificative quantitative approach to verify the hypothesis concerning the impact of Product and Service Quality on Customer Satisfaction. The findings of this research show that both product and service quality and consumer satisfaction levels recorded Cronbach’s Alpha values exceeding industry standards, indicating that the measurement tool used has a high level of reliability. Initially, the data distribution was not normal; however, after adjusting for extreme values, the distribution became normal. There was no evidence of excessive correlation between the Product Quality and Service Quality variables. The multiple linear regression analysis results indicate that both Product and Service Quality significantly affect Customer Satisfaction. Based on the coefficient of determination, it can be explained that about 37.5% of the variation in Customer Satisfaction is caused by the Product Quality and Service variables. It was confirmed through testing using the F-test and T-test that there is a significant relationship between Product Quality and Service Quality.

In this paper, a spatial price equilibrium model with information asymmetry in quality is developed. Producers at the supply markets are aware of the quality of their products, whereas consumers, located at the demand markets, are aware only of the average quality of the products that are shipped to their demand markets. We derive the governing equilibrium conditions, along with the variational inequality formulation. We then extend the model to include policy interventions in the form of minimum quality standards and provide an integrated variational inequality formulation of both models. We introduce a dynamic adjustment process for the evolution of the product shipments and quality levels over time and formulate it as a projected dynamical system. We establish qualitative results, in the form of existence, uniqueness, and stability analysis. An algorithm is proposed, along with a convergence proof. The algorithm tracks the evolution of the product shipment and quality level pattern until an equilibrium is achieved and, at each iteration, yields closed form expressions for the computation of the product shipments and quality levels. It is then utilized to compute solutions to a spectrum of spatial price equilibrium numerical examples in order to explore the impacts of information asymmetry under different scenarios.This work adds to the growing research on spatial competition and product quality but is the first to incorporate information asymmetry of this specific form in both equilibrium and dynamic model versions.

The article is aimed at studying the legal framework for organic agricultural production through the prism of the principles of legal regulation in this area, and also at formulating, on this basis, conclusions and proposals aimed at improving current legislation. One of the modern objects of agrarian legal regulation, as well as a way to implement the strategy of sustainable agricultural development, is organic agricultural production, which is a guarantee of balancing economic, environmental and social priorities of agricultural development, a guarantee of a high level of safety and quality of agricultural products, and ensuring food security of the State. The effectiveness of legal regulation depends on the level of scientific development of the principles, but a significant drawback of the current organic legislation is the absence of some important principles. An important basis for legal regulation of organic agricultural production is the principle of priority, which is a general requirement in the law that organic agricultural production has advantages over conventional production in the form of rules designed to ensure not only its stable functioning, but also the spread and improvement of such activities. The manifestation of the principle of priority of organic agricultural production is also evidenced by the state’s interest in a separate legal regulation of this type of activity and filling its content with some public law features that ensure the production of agricultural products of the highest quality. Given the undeniable strategic importance and priority of organic agricultural production, one of the main directions of the state agricultural policy should be state support for this activity. An extremely important characteristic of organic agricultural products is a high level of quality and safety. Therefore, the defining principle of the State policy of these social relations should be the principle of ensuring quality and safety and State control at all stages of production and circulation. Based on the analysis of current organic legislation, the article concludes that an essential need for proper legal regulation of relations in this area is the need to legislate the above-mentioned legal principles on which the State policy in the field of production, circulation and labeling of organic agricultural products should be based.