It would appear that there is no objective motivation underlying the prevalent consumer perception of a positive price-quality relationship. This situation is made. The relationship between price and objective quality is important for consumers who perceive that high prices signal high quality. Several. Past research has shown that, to varying degrees, consumers tend to believe price is an indicator of quality, even though there is in fact often.
Finally, a consumer might desire a nutritious food product but the consumer may be unable to determine the nutritiousness of a specific food product. Assuming that type 3 consumers exist, these consumers might use the level of price as a surrogate measure of the level of quality. We describe the behavior of type 3 consumers with equation 6.
At prices less than po, type 3 consumers behave contrary to typical economic behavior. Suppose the number of type 3 consumers is n3. In this situation, a company seeking its own best interest will se its price and quality according to equations 7 and 8respectively.
See the appendix for details. We see that as the number of type 3 consumers increases, the price charged for the product increases. We also see that as the number of type 3 consumers increases, the level of the quality also increases. Even though these consumer cannot detect quality, their desire for quality causes the company to increase the level of the quality. This conclusion may seem, at first glance, somewhat counter-intuitive.
We might question how consumers, who cannot detect quality, can encourage the company to provide more quality. Upon reflection, however, the answer is simple. Without type 3 consumers, i. The quality-sensitive type 2 consumer wants quality at almost any cost.
The company would provide high quality at a high price if it were not for the price-sensitive type 1 consumer.
These price-sensitive consumers depress the price and, because they place no value on quality, they also depress quality levels. With the introduction of type 3 consumers, the effect of type 1 consumers is diminished. With this effect diminished, the company is pleased to raise the price of the product while simuLtaneously persuading quality-sensitive type 2 consumers to increase their purchases by increasing the quality of the product. We should note that type 3 consumers could vastly outnumber type 9 consumers and the integrity of equations 7 and 8 would not be impugned.
Only when the number of type 3 consumers exceeds the number of type 1 consumers would the price-quality relationship be destroyed. Hence, even when very few consumers are able to detect quality, price-quality relationships exist.
It is only when few price sensitive consumers exist that price-quality relationships are destroyed. This fact may explain why even when we find few consumers can detect quality, companies still find drastic decreases in sales when they lower quality levels.
Moreover, we found that the existence of type 3 consumers, who use price as a surrogate measure of quality, actually cause the level of the quality to increase.
In this section, we examine the effect of competition on the price-quality relationshiP. High-Priced Low-Quality Competition In section II, we found the level of the price and the level of the quality that a company would adopt if there were no competitive brands in the market.
These levels are given by equations 7 and 8. Substituting the quality level given by equation 8 into equation 7we obtain the level of ,rice given by equation 9. It is the mixture of these consumers which creates the price-quality relationship. However, suppose a second company introduced a high-priced, low-quality brand into the market.
We might wonder if that introduction would destroy the price-quality relationship we previously observed across geographic market segments. The introduction of a high-priced, low-quality brand would attract type 3 consumers. Type 3 consumers would be attracted to the new brand because they would incorrectly associate the new brand's high price with a high level of the quality.
Defining and Relating Price, Perceived Quality, and Perceived Value
We see from equation 8 that a decrease in n3 results in a lower quality for the new brand. Equation 9 illustrates that a decrease in n3 results in a decrease in the price of the old brand. Hence, the original company will respond to this competitive entry by lowering both its price and its quality. However, other types of brands can also enter the market. A competitor might introduce a low-priced, low-quality brand.
In this case, the original company would lose some fraction of the type 1 consumers to the new brand. We see from equation 8 that the original company would respond by increasing the level of the brand's quality as nl decreases. Equation 9 tells us that the original brand's price will increase as the number of type 1 consumers decreases because of losses to the new brand. Another possible competitive entry might be a low-priced, high-quality brand.
In this case, the original company would lose some fraction of type 1 and type 2 consumers to the new brand. The original company will change its quality level to that level given by equation Equation 10 indicates as type 1 and 2 consumers are lost to the new brand, the old brand will increase the old brand's quality.
The corresponding price level is given by equation We see that as the fraction of lost consumers increase, the original company responds by increasing both its level of quality and its level of price. Finally, the introduction of a high-priced, high-quality competitive brand, would result in the movement of type 2 and type 3 consumers from the old brand to the new brand. We see from equation 8 that a decrease in the number of type 2 and type 3 consumers results in a decrease in the quality of the old brand.
We see from equation 9 that as n7 and n3 decrease, the old brand's price also decreases The results of this section are summarized in Table 1. Further, suppose that the second company offers this second product at the same price as the first company's product.
The already have examined how the first company should react to this new competition. However, suppose the second company continues to match the price of the first company without, of course, providing the associated quality.
We might wonder if a consumer who cannot identify the quality can ever distinguish between the two products. The answer to this query is related to the advertising expenditures of the two companies.
We might argue that the first company could use advertising to alert type 3 consumers of the quality differential. With informative advertising, type 3 consumers would no longer need to use the price as a surrogate for the level of the quality of the product. However, we could argue that the second company could use deceptive advertising to falsely claim that the second company's product also had the quality. If this counter advertising were to occur, type 3 consumers, who are unable to determine quality from inspection, would be unable to use the advertising message as a mechanism to distinguish the products.
Nelson ] argues that the second company does not have the incentive to advertise in this way because advertising is an investment. Advertising expenditures, Nelson argues, must be justified not only on the basis of added current sales but also on the basis of additional future sales.
Hence, companies with inferior products will not be willing to make large investments in advertising because that advertising can only increase current sales.
Once product trial has occurred, consumers will realize that the product is inferior and future sales will not be improved through advertising. Only companies with superior products will be willing to invest heavily in advertising because only these companies will enjoy repeat purchases which follow the initial advertising-inspired purchase. Nelson 's argument, of course, fails if type 3 consumers exist.
His argument is compelling as long as consumers learn. Learning prevents making a mistake twice and, hence, encourages only companies who expect repeat purchases to invest heavily in convincing consumer to make an initial purchase.
Type 3 consumers never learn so encouraging initial purchases by these consumers does not preclude future purchases even when the product does not possess the quality. Rather than making the tautological argument that the company with the quality product will have the convincing advertising, we will merely allow a company's advertising to make consumers aware of the company's brand.
Therefore, the company offering the quality product will sell the quantity of its product given by equation For expositional purposes, we will assume that awareness levels are quadratically related to advertising expenditures. That is, it takes A squared dollars to achieve an awareness level of A. In order to simplify the mathematics, we further assume that type 1 and type 3 consumers are divided evenly between the two brands, i.
The result is equation Equation 13 tells us that advertising expenditures will increase as the level of quality increases. Furthermore, the brand without the quality spends the least on advertising. Hence, advertising expenditures, i.
Equation 13 does assume an optimal price.
Defining and Relating Price, Perceived Quality, and Perceived Value - MSI Web Site »
Price, quality, and value in consumer goods. Type of Report Conceptual development. Objective To define the concepts of price, perceived quality, and perceived value; to relate these in a model; and to develop researchable propositions.
Method Reviews literature; conducts exploratory research including focus group study of consumers, in-depth interviews with managers, and in-depth interviews with consumers using free-elicitation procedures to obtain information on consumers' cognitive structures in the fruit beverage category; combines insights from these approaches to refine concepts and develop 22 propositions. Target Audience Consumer goods marketers and academic researchers.
Conclusions To understand consumer purchase behavior, it is necessary to look at consumers' perceptions of the quality and value of a product.
It is also necessary to consider consumers' perceptions of what they must give up, i. Perceived quality is not equivalent to objective quality; it cannot be measured in terms of technical superiority or adherence to physical standards. Perceived quality is an abstract evaluation or judgment of a product that is formed from intrinsic attributes of the product e.
Often a specific attribute will cue customers to quality. For example, in the case of fruit drinks, the attribute of percent fruit juice with no sugar added cued most of the sample to quality.
Price-Quality Relationships by Steven M. Shugan
Some studies suggest that the importance of extrinsic versus intrinsic attributes in forming quality perceptions varies depending on how easy the intrinsic attribute is to evaluate at a particular point in the purchase and consumption process. Extrinsic cues and abstract dimensions that contribute to quality are less product specific and more generalizable across product categories than intrinsic cues. Cues that signal quality to consumers may change over time due to competition, a marketer's promotional effort, changing technology, changing customer tastes, and availability of information.
Consumers seem to set a minimum standard of quality which a product must meet to be acceptable. But consumers frequently do not purchase the alternative that they perceive as having the highest quality. Considerations of price and value intervene. A growing body of literature indicates that consumers do not always attend to, know, and remember actual prices of products; instead, they encode prices in ways that are meaningful to them e.
Therefore, perceived price is not equivalent to objective price. Costs other than price--time, effort, search, psychic-- also enter into the purchase process as sacrifices that must be made to obtain the product. No direct relationship has been found between price and objective quality or perceived quality. It is hypothesized that product category factors, individual factors, and informational factors affect the use of price as a quality indicator.