Signal Of Product Quality Research Articles

A Dynamic Model of Brand Choice When Price and Advertising Signal Product Quality

In this paper, we develop a structural model of household behavior in an environment where there is uncertainty about brand attributes and both prices and advertising signal brand quality. Four quality signaling mechanisms are at work: (1) price signals quality, (2) advertising frequency signals quality, (3) advertising content provides direct (but noisy) information about quality, and (4) use experience provides direct (but noisy) information about quality. We estimate our proposed model using scanner panel data on ketchup. If price is important as a signal of brand quality, then frequent price promotion may have the unintended consequence of reducing brand equity. We use our estimated model to measure the importance of such effects. Our results imply that price is an important quality-signaling mechanism and that frequent price cuts can have significant adverse effects on brand equity. The role of advertising frequency in signaling quality is also significant, but it is less quantitatively important than price. In the printed version of Marketing Science, Vol. 27, No. 6, Erdem et al. (2008) was mistakenly identified as a Research Note. It is a regular article and has been corrected here and in the online table of contents.

Profit as a signal of product quality and customer service: performance evaluation for plant managers

Plant managers generally have no direct marketing responsibilities but they have control over product quality and customer service. This paper hypothesises that many firms evaluate these managers on profit because sales, a component of profit, convey information on a plant manager's performance on product quality and customer service. Several predictions are developed from the hypothesis and tested in this study. The chance that a plant manager is evaluated on cost vs profit is predicted to decrease with the sensitivity and precision of sales as an indicator of product quality and customer service. In addition, the chance that a plant manager is evaluated on cost vs profit may be associated with the extent to which the manager is also evaluated on specific measures of product quality and customer service. Empirical results are generally consistent with these predictions.

A Dynamic Model of Brand Choice When Price and Advertising Signal Product Quality

In this paper, we develop a structural model of household behavior in an environment where there is uncertainty about brand attributes, and both prices and advertising signal brand quality. Four quality signaling mechanisms are at work in the model: 1) price signals quality, 2) advertising frequency signals quality, 3) advertising content provides direct (but noisy) information about quality, and 4) use experience provides direct (but noisy) information about quality. We estimate our proposed model using scanner panel data on ketchup. If price is important as a signal of brand quality, then frequent price promotion may have the unintended consequence of reducing brand equity. We use our estimated model to measure the importance of such effects. Our results imply that price is an important quality signaling mechanism, and that frequent price cuts can have significant adverse effects on brand equity. The role of advertising frequency in signaling quality is also significant, but it is less quantitatively important than price.

Influence of Informed Buyers in Markets Susceptible to the Lemons Problem

It is shown that the presence of informed buyers is necessary but not always sufficient for producers to use prices as signals of product quality. A sufficiently high fraction of informed buyers eliminates the lemons problem. A small fraction of informed buyers mitigates the lemons problem, provided that buyers' prior belief of high quality is sufficiently pessimistic: price reveals high quality at a signaling cost which increases with market power. However, if buyers' prior belief of high quality is optimistic when the market is poorly informed, then the lemons problem is not overcome.

The Advertising of Credence Goods as a Signal of Product Quality

The advertising of credence goods is analysed in a similar way to the way Milgrom and Roberts analysed the advertising of experience goods. The existing literature on credence goods has not considered the possibility that some consumers have the expertise to assess the product's quality and the possibility that the producer can advertise. I assume these two points and show that there exists a unique equilibrium that survives the ‘intuitive criterion’. Also, it is shown that through encouraging producers to accept new technologies advertising may increase social welfare instead of just being a pure social cost.

Advertising repetition and quality perception

Nelson [J. Polit. Econ. 78 (1970) 311; J. Polit. Econ. 81 (1974) 729; Nelson P. The economic value of advertising. In: Brozen Y, editor. Advertising and society. New York: New York Univ. Press, 1974. pp. 43–66] has argued that advertising spending is a signal of product quality for experience goods because consumers can rationally infer that high-quality products would advertise more than low-quality products. In this paper, we compare Nelson's view of advertising with marketing views of advertising using ad repetition as a surrogate for ad spending. Our results show limited support for Nelson's theory but substantial support for ad repetition influencing perceived quality through attitude toward the ad.

Valuing Varieties with Imperfect Output Quality Measurement

AbstractMarkets for agricultural products may be inefficient when signals do not adequately reflect product characteristics important to market participants. Preferences can be explicitly reflected in price premiums for measurable characteristics using hedonic methods. However, when product quality information is costly to obtain, the problem is compounded. Bundling of quality traits by variety can serve to signal product quality. A procedure is developed to derive the value of different varieties in meeting buyer demands. An application to the hard red spring market wheat illustrates the use of a procedure to distinguish among varieties and provides empirical support for the existence of Akerlof's lemon market in the release of wheat varieties.

Is advertising a signal of product quality? Evidence from the compact disc player market, 1983–1992

We study panel data on advertising and pricing in the compact disc player market during 1983–1992. Controlling for product features, firm heterogeneity, and aggregate effects, (i) advertising increases after the player is introduced, but at a decreasing rate; and (ii) price falls from the outset, and at an accelerating pace. These patterns are inconsistent with both the perfect learning in papers by Kihlstrom and Riordan [J. Polit. Econ. 92 (1984) 427]; and Milgrom and Roberts [J. Polit. Econ. 94 (1986) 796] and the imperfect learning in Horstmann and MacDonald [J. Econ. Manag. Strat. 3 (1994) 561] versions of paper by Nelson [J. Polit. Econ. 82 (1974) 729] model of advertising. Extensions having persistent consumer uncertainty and learning can explain these profiles.

Cross‐cultural consumer decisions: consideration sets – a marketing universal?

This research explores the existence of consideration sets as a marketing universal by evaluating consideration set sizes for a shopping good in a cross‐cultural context. Previous studies of marketing universals investigated consumers’ use of product quality signals for shopping goods. This study used two operational definitions of a consideration set and found that both the average number of brands considered and the number of brands tried on were statistically equal for two matched samples in different cultures, supporting the status of consideration sets as a marketing universal.

Measuring the efficiency of stochastic signals of product quality

This paper explores how consumers combine stochastic signals, hence differentiating it from a game theoretic approach, of product quality from a search theoretic perspective. Individuals will tend to progress towards more cost efficient signals as they get older. Based on this analysis signals are ranked both in terms of cost effectiveness and signal precision.

Warranty and warrantor reputations as signals of hybrid product quality

Examines the use of warranty and warrantor reputations, which have been shown to be credible signals of product quality for uni‐national products, to overcome consumers’ negative perceptions about hybrid products. An experiment is conducted, in which the level of warranty coverage and the warrantor’s reputation are manipulated. Results indicate that warranty strategies, in terms of warranty coverage and warrantor reputation, are effective in overcoming consumers’ negative perception about the hybrid product’s quality. Strategy implications for firms in the advanced and emerging economies are discussed.

Location costs, product quality and implicit franchise contracts

In the literature on international trade, only little attention has been given to informational asymmetries between firms and consumers with respect to product quality. The few economic models that analyze the question of how asymmetric information about product quality might affect trade flows treat product quality as exogeneous. In contrast, our model takes product quality as an endogeneous variable, i.e. firms can choose the quality they wish to produce. In this case, location costs can signal product quality under certain conditions and thereby affect international trade flows. More specifically, intra-industry trade in vertically differentiated experience goods can be determined by information asymmetries about product quality.

A Bayesian approach to the evaluation of stochastic signals of product quality

This paper explores consumers’ use of stochastic signals of product quality from a Bayesian perspective. Stochastic signals are implicit in many of the analyses on signal usage in the marketing literature and yet formal analysis of their use has been relatively limited. The basis for our analysis is a seminal paper by Winkler on combining experts’ forecasts into a single consensus distribution, together with the resulting literature to which this has given rise. This is a substantial body of literature and represents a readily available fund of results which can be used within the marketing context. Hence, it is shown that the weights on different signals will be inversely related to the variance of the signal and need not be convex. It is also shown that for repeatedly purchased goods, signals will play a decreasing role as the consumer gains experience of the good.

Intermediation Can Replace Certification

We consider a market in which consumers do not have perfect information about product quality. Producers can perfectly reveal that a good is of high quality through certification, which entails socially wasteful costs. Firms can choose whether to sell through an intermediary or to sell independently (vertical integration). We show that multibrand retailing, which leads to a redistribution of profits but not to social costs, can fully or partially replace certification by signaling product quality. Renting the image of a competing high‐quality brand is shown to be an outcome that can be sustained through intermediation.

Intermediation Can Replace Certification

We consider a market in which producers and an intermediary have perfect information about the qualities of the goods. Consumers do not observe the qualities. Producers can perfectly reveal that a good is of high quality through certification. This entails socially wasteful costs. Firms can choose whether to sell throufh an intermediary jointly or exclusively or to sell independently (vertical integration). We show that multi-brand retailing, which leads to a redistribution of profits but not to social costs, can fully or partially replace certification by signaling product quality.

An empirical examination of advertising as a signal of product quality

Using data from the U.S. automobile industry we test for evidence consistent with game-theoretic models of advertising and quality signalling. We find that manufacturers use both price and advertising to signal the quality of their products; when price exceeds the full information case, manufacturers use above average levels of advertising. We also find a positive association between higher future sales and current advertising levels for automobile models. These results are consistent with game-theoretic signalling models and reported management practices.

Signaling Quality with a Money-Back Guarantee: The Role of Transaction Costs

Direct marketing is witnessing explosive growth. As consumers increasingly purchase products from their homes, their ability to judge the quality of products they buy is significantly reduced. In this paper we study how money-back guarantees can signal product quality in such environments. We interpret product quality broadly to mean both the level of attributes promised as well as the firm's consistency in delivering on those promises. Key aspects of our formulation are the explicit consideration of transaction costs, and alternative signals of product quality. Transaction costs are the costs the seller or buyer faces when redeeming a money-back guarantee. We show that money-back guarantees signal quality by exploiting the higher probability of returns for a lower quality product, and the attendant higher transaction costs. However, if the seller's transaction costs are very large, then there are less costly ways to signal, namely charging a high price. We compare the signaling performance of (1) price, (2) price with uninformative advertising, and (3) price with a money-back guarantee. Whereas uninformative advertising does not work at all in our model, under certain conditions a money-back guarantee is necessary to signal, and under other conditions, a money-back guarantee is a useful supplement to price.

Advertising as Information: Further Evidence

In the past 30 years, the economics of information has become an important feature of the revolution in modern microeconomic theory. The seminal literature includes theoretical advances by Stigler [10], Nelson [7; 8], Spence [9], and Darby and Karni [1]. In an original approach, Laband [3] tests the proposition that the supply of product quality signals increases with a rise in the expected marginal return to consumers utilizing Yellow Pages advertisements in various urban settings. In later expositions, Laband [4; 5] provides further evidence of the durability of the informational content and the differences in information provision of television and commercial advertisements for different types of goods. The present paper extends and provides alternatives to Laband's tests of the impact of time costs (faced by consumers) on the informational content of advertising. This study employs a supplementary category (to Laband's) of credence goods developed in the literature [2; 6], and analyzes the impact of income as a proxy for time and information costs with a unique, intra-city data set from New York City and Los Angeles.

SIMULTANEOUS ADVERTISING AS A SIGNAL OF PRODUCT QUALITY*

Australian Economic PapersVolume 33, Issue 63 p. 186-199 SIMULTANEOUS ADVERTISING AS A SIGNAL OF PRODUCT QUALITY* BILL Z. YANG, BILL Z. YANG Flinders University of South AustraliaSearch for more papers by this author BILL Z. YANG, BILL Z. YANG Flinders University of South AustraliaSearch for more papers by this author First published: December 1994 https://doi.org/10.1111/j.1467-8454.1994.tb00859.xCitations: 2 † *I am grateful to Andrew Daughety and Jennifer Reinganum for their advice. I also wish to thank Andreas Blume, Jeff Borland, Zhiqi Chen, Ray Riezman, Michael Riordan, Shiou Shieh, Editor Dicky Damania, two referees and the seminar participants at Iowa, Monash, the Midwest Mathematical Economics Conference (Northwestern) and 1993 Conference of Industrial Economics (Sydney) for their comments on earlier versions. Research support from NSF via grant SES-8903157 is acknowledged. The standard disclaimer applies. AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume33, Issue63December 1994Pages 186-199 RelatedInformation

Marketing Universals: Consumers' Use of Brand Name, Price, Physical Appearance, and Retailer Reputation as Signals of Product Quality

Marketing universals are defined as consumer behaviors within a segment and toward a particular product category that are invariant across cultures. Using several definitions of culture and three d...