Price-quality Tradeoffs Research Articles

Price-quality trade-off in procurement auctions with an uncertain quality threshold

Procuring high-quality goods at reasonable prices is a critical public sector concern. Yet, procurers often do not advertise clear weighting rules for price and quality but set a flexible quality threshold upon participation. This paper studies endogenous entry and bidding behavior in such procurement auctions. Using unique data on pharmaceutical procurement in Guangdong, China, we find that a high-quality index acts as a signal of high production costs. We also observe that high-quality bidders are more likely to withdraw from bidding because of their prior commitment to quality. The procurers who use quality indicators in price auctions need a carefully considered quality threshold. Our results have important implications for price-quality trade-offs in procurements that have uncertain quality thresholds.

A meta-analysis of extremeness aversion

Using a meta-analysis of 142 experimental observations, this work examines the influence of different research design and outcome measures on extremeness aversion (i.e., the propensity to avoid extreme options in choice situations). The results indicate that extremeness aversion is a robust phenomenon: middle options are significantly more often selected than other options. However, the strength of this behavioral effect exhibits substantial variation (up to three times the average magnitude) across methodological decisions: employing price-quality tradeoffs, nondurable categories, or binary-trinary choice-set comparisons tend to reduce the probability of extremeness aversion among consumers, whereas using a larger number of tradeoff dimensions, non-numeric attributes, high-quality extensions, or utilitarian products increase its likelihood. Because extremeness aversion has been assessed using three different measurement paradigms (absolute-share changes, relative-share shifts, and middle-option proportions), we discuss their characteristics and investigate their degree of agreement. We find that the three measures can lead to rather different effect magnitudes and even contradictory conclusions about the effect of moderators.

Optimal pricing in tiered markets

One explanation for the phenomenon of asymmetric inter-tier competition is based on the notion of price–quality trade-offs. In this article, we extend the framework to derive new results for differential pricing strategies for brands in different tiers and demonstrate these results for different market configurations. The article makes two unique and important contributions. First, the article derives and demonstrates several pricing strategy implications that are useful for academic researchers and marketing managers. Second, this research extends the theoretical explanation to realistic market configurations consisting of more than two brands.

Income Distribution and the Public-Private Mix in Health Care Provision: The Latin American Case

Recent literature on Latin American countries shows that private expenses as a share of the total expenditures in health tend to be higher the lower the nation`s level of economic development. This paper considers a discrete choice model of product differentiation, where consumer choice is based on a price-quality tradeoff. Physicians are involved in a dual-job holding structure, working as agents in the official sector while they maximize profits in a fragmented private sector.

Using Decoy Effects to Influence an Online Brand Choice: The Role of Price–Quality Trade-Offs

This research aims to investigate decoy effects on online brand choices. To assess the influence of decoys, we test decoy effects on three constructs-product involvement, judgment conditions, and decoy conditions-within an online experiment. A survey of 635 Internet users and a 2 × 2 × 3 ANOVA between-subjects experimental design is used to guide the research design and the systematic analysis procedure. A major finding of this study is that a standard decoy seems to have a significant effect on an advertised (target) brand for high-involvement products; from the survey, it is also apparent that competitors can also use inferior decoys to increase brand preference for low-involvement products.

Who Determines the Optimal Trade-Off between Quality and Price?

The question of the optimal trade-off between quality and price has become increasingly important as well as complex in recent times, as the advances of modern technology permit a far more refined range of choices. These subtleties among choices allow an individual, a group, or a society to titrate more precisely degrees of quality with almost any product or service, coupled, of course, with counterbalancing price consequences. In 2002, as Program Chair of the Antitrust Section of the Association of American Law Schools, I organized a panel entitled “Guilds at the Millennium: Antitrust and the Professions” and served as one of its commentators. The focus of this comment is not on the typical antitrust questions regarding regulating professionals in the face of asymmetric information or, in particular, how to cope with the potential anticompetitive effects of allowing the professions to regulate themselves. That issue is explicated quite cogently and extensively by the other commentator on this panel. Rather, the purpose here is to draw attention to another problem submerged within and yet intertwined with these discussions — the determination of the socially optimal trade-off between quality and price in the context of professional regulation. Co-extensively, this comment raises the question as to what antitrust's role should be in making such important price-quality trade-off decisions.

Deregulating Network Industries: Dealing with Price-quality Tradeoffs

This paper examines the effects of introducing competition into monopolized network industries on prices and infrastructure quality. Analyzing a model with reduced-form demand, we first show that deregulating an integrated monopoly cannot simultaneously decrease the retail price and increase infrastructure quality. Second, we derive conditions under which reducing both retail price and infrastructure quality relative to the integrated monopoly outcome increases welfare. Third, we argue that restructuring and setting very low access charges may yield welfare losses, as infrastructure investment is undermined. We provide an extensive analysis of the linear demand model and discuss policy implications.

Deregulating Network Industries: Dealing with Price-Quality Tradeoffs

This paper examines the effects of introducing competition into monopolized network industries on prices and infrastructure quality. Analyzing a model with reduced-form demand, we first show that deregulating an integrated monopoly cannot simultaneously decrease the retail price and increase infrastructure quality. Second, we derive conditions under which reducing both retail price and infrastructure quality relative to the integrated monopoly outcome increases welfare. Third, we argue that restructuring and setting very low access charges may yield welfare losses, as infrastructure investment is undermined. We provide an extensive analysis of the linear demand model and discuss policy implications.

Do Textbook Publishers Release New Editions Too Frequently?

Conventional wisdom among students, professors and, of late, state legislators is that the basic reason for a revised edition of a college textbook is to kill off the existing used book market. However, simple economic analysis shows that this is unlikely to be true. A legislative mandate to increase the duration between new editions could increase the price paid by students and make textbooks less useful from the point of view of professors. I offer a simple and practical alternative proposal that would make professors more sensitive to the price-quality tradeoff in textbooks.

The paternity of the price-quality ‘value map’

In the literature on firm strategy and product differentiation, consumer price–quality trade-offs are sometimes represented using consumer ‘value maps’. These involve the geometric representation of indifferent price and quality combinations as points along curves that are concave to the ‘quality’ axis. In this paper, it is shown that the value map for price–quality tradeoffs may be derived from a Hicksian compensated demand curve for product quality. The paper provides the theoretical link between analytical methods employed in the existing literature on firm strategy and competitive advantage with the broader body of economic analysis.

Top Indian IT Companies are Shying Away from Domestic Government Projects - Are They Justified?

This Paper seeks to look at the Indian government and domestic technology requirements from a financial perspective and traces the growth and the development of both exports and the domestic market. It then seeks to enumerate the reasons why top Indian IT corporations are shying away from government projects. Key aspects including cost structures, margins, growth prospects, and transparency are discussed. We then look to analysing whether this is the right thing to do in terms of long-term growth and sustenance of the industry. The issue of the perceived Price-Quality trade-off is also discussed. The paper concludes with suggestions on how the government can utilise the skills of these corporations in the best possible manner for the creation of a robust and powerful technology platform.

Price-Quality Tradeoffs and Welfare Effects in Cable Television Markets

The Telecommunications Act of 1996 reduced restrictions oin the cable TV industry, providing completely deregulated rates in March 1999. In this paper, we develop a simple tradeoff between price and quality in order to calculate the welfare tradeoff to consumers of the provision of one additional satellite channel.

Spokesperson Fame and Vividness Effects in the Context of Issue-Relevant Thinking: The Moderating Role of Competitive Setting

Primarily on the basis of research from noncompetitive settings, it is generally believed that nonsubstantive advertising features are ineffective when consumers engage in issue-relevant thinking. Experiment 1 of the current study replicated prior research. Neither spokesperson fame nor the vividness of advertising copy influenced attitudes in noncompetitive settings. However, these same features proved effective in the context of balanced competition. When brands were homogenous (experiment 2) or characterized by large price-quality trade-offs (experiment 3), nonsubstantive features improved attitudes and choice probabilities despite issue-relevant thinking. When trade-offs were small, however, nonsubstantive features were again ineffective. The results suggest that balanced competition can neutralize the effects of substantive features, increase indecision, and promote perceptual contrast. These effects then empower nonsubstantive features to serve as heuristics and/or reduce the risk of postpreference regret.

An Analysis of Complaint Data in the Automobile Insurance Industry

An Analysis of Complaint Data in the Automobile Insurance Industry Abstract Cross-firm policy service quality differences are investigated in the automobile insurance market through empirical testing of firm-specific complaint data. The data used here are publicly available complaint ratios which are collected by regulators in some states to assist consumers in service quality discrimination. Previous studies have shown independent agency firms to have larger expense ratios than direct writers, but empirical evidence here does not suggest that direct writers provide lower service quality than do independent agency companies. The evidence suggests that firms specializing in high risk drivers receive relatively more complaints. Evidence of cross-firm price variation for homogeneous automobile insurance contracts has been documented by Jung (1978), Dahlby and West (1986), and Berger, Kleindorfer and Kunreuther (1989). Smallwood (1975) suggests that service quality differences across insurers may explain price dispersion.(1) Investigation of quality differences across insurers has been limited, largely due to difficulty in identifying empirical measures of service quality.(2) This study uses state insurance department firm complaint ratios from California, Illinois, and New York, as an empirical measure of firm service quality. The California ratio equals the number of complaints received per 1,000 covered automobiles, and the Illinois and New York ratios equal the number of complaints received divided by written premiums. A relatively large complaint ratio suggests that the insurer provides poor service quality. The complaint ratio is an imperfect measure of firm service quality, since complaints result from disappointed expectations of the insured which may or may not be strictly due to poor service. However, the complaint ratio is what state regulators collect and use to measure consumer satisfaction with policy service quality, and use of the ratio here allows a first step toward empirical investigation of possible cross-firm quality differences. Following survey results in Consumer Reports (1988) and a Gallup poll conducted for Best's Review (1989), results here suggest that service quality differences exist across automobile insurers. The Economics of Quality Determination Evidence supports characterization of the property-liability insurance market as competitive.(3) In a competitive market, buyers make price-quality tradeoffs when choosing insurance coverage. Buyers purchase coverage based on expected full price, which equals premium plus complaint price, where complaint price is the loss in value to the insured of not receiving expected service. Based on work by DeVany and Savings (1983), an economic model describes firm service quality determination in a competitive market. Full price is specified as follows: P = p* + [Alpha] and [Alpha] = [Alpha] (v, o, c), where P is full price, p* is the premium, and [Alpha] is the complaint cost to the insured. Complaint cost can include implicit and nonpecuniary costs to the insured of not receiving good service. The variable, [Alpha], is a function of v, the marginal value of policy service to the insured; o, the total output of service provided to all policyholders; and c, the capacity of the firm to provide service. The function [Alpha] is assumed to be increasing in v since expected complaint cost increases with the insured's marginal value of customer service. The function [Alpha] may be increasing in o and decreasing in c: if an insurer with fixed service capacity provides increased output of policy service, increased complaint costs may result. That is, if the firm's resources are limited and the frequency and severity of claims increase, the quality of service may decrease, leading to increased complaint costs. …

Price—quality integration in warranty evaluation a preliminary test of alternative models of risk assessment

In two conceptual replications of Shimp and Bearden (1982), subjects reported ratings of perceived risk based on three dimensions of a new product introduction: warranty coverage, warrantor reputation, and price. In the first study, several two- stage integration rules, derived from Anderson's (1982) functional measurement methodology, were proposed to account for the findings. Contrary to past research suggesting the existence of subtractive price-quality trade-offs, a subject-by-subject analysis of the data suggests the existence of both subtractive and nonlinear integration rules. A second experiment tested a more specific single-stage risk model in a subject replication design. As expected, the second study provided statistical evidence confirming the graphical evidence of the first study. Together, these studies a) constitute a successful replication of Shimp and Bearden's (1982) work on warranties, and b) demonstrate that subtractive integration rules do not adequately explain risk reduction efforts in warranty assessments with new product innovations.

Estimating Price-Quality Tradeoffs Using Comparative Judgments

A subtractive model was found to describe how subjects traded off price and quality values when equating two purchases of ground beef. Derived estimates of price change per unit of quality varied as a function of whether price or quality judgments were required and whether the quality dimension was expressed in positive (percent lean) or negative terms (percent fat). Results were discussed in terms of factors that affect the generality of conclusions about price—quality tradeoffs.

Information integration in price-quality tradeoffs: the effect of missing information.

Support for averaging processes in information integration has relied on experimental designs in which the amount of information to be integrated was varied. The usual interpretation is that subjects balance the values of the various stimuli presented on a given trial. An alternative interpretation is that subjects may use their perceptions of the relationship between stimulus dimensions to infer the value of missing information. In the present study, subjects were asked to rate their expected satisfaction with purchases of ground beef on the basis of quality and/or price information. The responses of some subjects appeared to be based on the inference that high prices imply high quality and low prices imply low quality when no quality information is given. Other subjects appeared to assign a constant value to missing information. An averaging model that incorporates inferred as well as presented stimulus values is proposed.

An Analysis of the Impact of Open Entry on Price and the Quality of Service in the Airline Industry

D URING the past three years there has been a gradual transition toward deregulation of the airline industry by the Civil Aeronautics Board (CAB) as originally proposed in the Federal Aviation Act of 1975 and finally enacted in the Airline Deregulation Act of 1978. This move is intended to allow for competitive pricing and freedom of entry and exit in the domestic airline markets during 1981. So far, the price competition has been restricted by the CAB to the offering of discount and standby fares. The impact on price has been a reduction in revenue per passenger mile from 8.24? in 1977 to 8.02? in June of 1979.1 Over this same period the quality of service has declined as measured by an increase in the load factor from 56.1% to 63.6%. This result is consistent with most predictions regarding the impact of price competition in this industry.2 Alfred Kahn (1978) has argued that price competition by itself would (and should) result in a variety of services for consumers but that it could reduce the average quality of service via higher load factors. Price competition is, however, only one dimension of a fully competitive airline market. While price competition will certainly tend to increase load factors, the effect of entry should be to lower them as firms compete through scheduling frequency. The interaction between these forms of competition produces a technical tradeoff between lower prices and higher quality of service and thus raises the question of what a truly competitive airline market will provide the consumer of airline services. This paper examines this intrinsic tradeoff between price and quality in the provision of airline service and analyzes the implications for a competitive airline industry. The presence of this tradeoff has been suggested in the theoretical models of Douglas and Miller (1974b) and DeVany (1975). In both models there is purported to be an inverse relation between the load-factor and the number of firms in a market due to scheduling competition and an inverse relation between the load-factor and the fare level due to profit-maximizing supply responses of firms serving the market.3 It is these theoretical propositions that produce a tradeoff between fare level and the quality of service and make the effects of competition in the typical airline market difficult to predict. Using these theoretical models as a basis, this paper develops an empirical analysis of the relation between fare level, open entry and the quality of service and its implications for a competitive airline market. This involves, first, estimating the equilibrium price and load factor which results from competition in a market with a fixed number of firms. Then, the independent effect of open entry on the competitive market outcome is identified by varying the number of firms and examining the capacity response due to scheduling competition. This analysis yields the zero-profit price and load factor for varying degrees of market concentration. JThe profitmaximizing and output-maximizing price-quality combinations are also generated for the same market conditions. A comparison of these alternative market solutions provides the basis for analyzing the inherent price-quality tradeoff in the provision of airline service and some insight into the nature of a fully competitive airline market. Crucial to the analysis proposed above is an empirical estimate of the supply response of firms serving a city-pair market to changes in Received for publication April 23, 1980. Revision accepted for publication April 15, 1981. University of Texas at Arlington and Southern University of New Orleans, respectively. I These figures are computed using data on domestic trunk carriers in all U.S. markets. They are taken from Air Transport (1979). 2 This prediction follows from the generally accepted theoretical model as developed by DeVany (1975) and Douglas and Miller (1974b). I Douglas and Miller (1974a,b) provide some empirical evidence of the inverse relation between the average load factor and the number of firms serving the market using a crosssection sample of city-pair markets operating in the United States. Similarly, DeVany (1975) provides some preliminary empirical tests of his model and finds the results to be generally consistent with these theoretical propositions.

Model Testing Techniques and Price-Quality Tradeoffs

Two model testing techniques are described that complement the usual conjoint measurement tests. The methods are demonstrated by modeling how tradeoffs are made between price and quality in choosing a hypothetical restaurant. Results from a convenience sample show that a subtractive, and not a ratio, model can represent the data.