Prices, Product Qualities and Consumer Perceptions: An Empirical Study

Abstract

A lot of theoretical studies suggest that unobservable qualities can be signaled byprices based on consumers having rational expectations that constrain the sellersnot to shirk on quality when consumers buy the product in a repeated setting.However, empirical tests of this literature are limited. They have not establishedwhether consumers do have rational expectations of quality and find only veryweak evidence on whether price indeed works as a signal of unobserved quality.We choose AA dry batteries as a typical experience good to do an empirical studyand consumer surveys are conducted to find out whether consumers have rationalexpectations about quality given the information on price. Results validate thatprice signals unobservable quality for batteries. Results also suggest that otherfactors such as country, brand, retailer, type of batteries, and purchasingplace alter the relationship between price and unobservable quality.