Price quality relationship theory and research

price quality relationship theory and research

of quality, numerous studies have examined the price-quality relationship (Alpert . In an economic theory of a perfectly competitive market, price and quality are. Advances in Consumer Research Volume 11, Pages PRICE- QUALITY RELATIONSHIPS. Steven M. Shugan, University of Chicago. ABSTRACT. For most products the relationship between price and quality was weak. Product Quality: Issues, Theory, and Results,'Journal of Consumer Research, 13, pp.

Demand characteristics, however, are potentially present in all three studies. Gardner reported significant main effects but no interactions between product type or search time factor, and price.

In a second study, however, Gardner failed to find a similar affect involving the price cue.

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Gardner's second study, however, also examined the influence of brand name on quality ratings. It is possible that brand name, as an information chunk, has a more powerful effect on reported quality measures than does the price cue. Jacoby et al tentatively hypothesized that a product's physical characteristics may enter into a complex interaction with information cues such as price and reported quality measures.

Valenzi and Andrews' study found significant main and two-way interaction effects between physical composition cues and price cues. The Valenzi experiment appears to add credibility to Jacoby's hypothesis. Other studies, however, have failed to identify any price-cue relationship.

Szybillo and Jacoby reported no significant main or interaction effects on quality evaluations and brand name and store image information. This study represents one of the few published experiments where the findings are non-significant with regard to price-cue effects. The results of this study, however, were also not conclusive because of potential demand characteristics in the price present conditions. While most multiple cue studies find significant price cue effects, some researchers have found that price remains the dominant cue Andrews et al and others have found that it declines in importance Jacoby et al ; Rao To date, this conflict has been difficult to reconcile.

Gardner has suggested that price effects on quality perceptions are product specific which may account for some of the confusion in the literature.

price quality relationship theory and research

Olson identified four major problems with the previous price cue research: Olson suggested that these methods logical weaknesses have confounded the interpretability of the price-cue literature. In summary, there is convincing evidence that in the absence of other cues, price acts as a significant information cue.

In contrast, multiple cue studies have not demonstrated consistent price cue effects. Olson suggested that some of the inconsistencies may be attributable to serious methodological flaws or measurement problems.

This experiment is designed to control for the sources of error identified by Olson and explore possible alternative explanations for the price cue effect. Fair price theory Kamen and Toman and adaptation level theory Monroe suggest that the consumer evaluates subsequent price cues after comparison with an adaptation level price. Monroe has further observed that an individuals standard for judging stimuli is actually like a sliding scale that is influenced by previous stimulus values.

While these theories are informative and are of considerable value in single cue studies, they do not adequately explain the complex interactions reported in multiple cue studies. Further, the inconsistent findings reported in the price literature have seemingly confounded the identification of reliable theoretical constructs.

Therefore, rather than propose a conceptual framework based on inadequate or unreliable constructs, the purpose of this study will be to test, rather than explain, the price-quality relationship. The focus of this study will be on the remaining two issues raised by Olson The specific research hypotheses are: Quality ratings will be differentially affected by price. Product information will moderate the price cue effect H3: Place of purchase will differentially affect quality ratings.

Order of price presentation will not differentially affect quality ratings. Hypotheses 1, 2, and 3 were extracted from the pricing literature and pertain to the validity of the price-quality relationship. Hypothesis 4, however, was based on the observation that pricing studies have typically not reported any randomization of price presentation formats i. This suggests that the randomization of the price format is either so common-sensical as to exempt its mention, or implicitly that price presentation will not differentially affect quality ratings.

Monroehowever, provides some evidence that ordering effects to occur. The purpose of H4 is to test the ordering effect within the contest of the price quality relationship.

Subjects were drawn on a convenience basis and were given extra credit for their participation. A 2 x 2 x 3 factorial experiment design was utilized. The respective factors consisted of two information levels with or without product information providedtwo stores product was identified as either coming from a department store or a carpet specialty store.

Price levels were treated as a within subjects factor, while information and place of purchase were considered as a between subjects factor. Figure 1 illustrates the treatment conditions. FIGURE 1 Carpeting was selected as the experimental product because of its use in other price related experiments Enis and Stafford ; Landon and Schaffer ; Shapiro ; Wheatley and Chiu and because college students were presumed to have little experience making quality assessments of carpeting.

Ali carpet samples were identical but controls, as later discussed, were utilized to minimize student's guessing that the samples were in fact identical. Information about carpeting was developed from a pretest of 38 college students in a different section of introductory marketing during the same period.

The pretest subjects were asked what types of information they would like to have prior to making a carpet purchase and what they thought the range of prices would be for a square yard of carpeting.

Anticipated price ranges were used rather than actual price ranges to more accurately reflect the student's perceptions of carpet price ranges. Product information was developed i. Student; were also asked if they knew much about carpeting and the consensus was that they did not. Subjects were randomly assigned to treatment conditions Dept.

Neither the "with or without" information groups were given price information. Subjects provided with information were given three minutes to read the information and given the opportunity for more time if they requested it.

Is There a Valid Price Quality Relationship? by Richard J. Rexeisen

No subject requested additional time to read the information. Within each treatment condition subjects were presented first with a carpet sample that had no price on it. Section II begins by studying a market consisting of three types of consumers.

We ask whether or not the consumers, who use price as a cue to quality, destroy the price-quality relationship. Section III examines competition and whether or not competition destroys the price-quality relationship. Section IV discusses how consumers may also be using nonprice cues to quality. Section V extends our previous analysis to a multidimensional concept of quality.

Finally, section VI provides a summary of our conclusions. We investigate a market with a product which possesses but one quality. The quality might be any aspect of the product as long as the presence of the quality provides some benefit to some, but not necessarily all, consumers. Type 1 Consumers Some of the consumers in this market are not concerned with this quality of the product.

These consumers are very price sensitive. They will buy the lowest priced product regardless of the level of the quality. These consumers are called type 1 consumers. We describe the behavior of the price sensitive, type 1 consumer with equation 1.

The quantity of the product that type 1 consumers buy, is not influenced by the level of the quality of the product. Type 2 Consumers In order to make our analysis more general, we will allow consumers to exist who do not behave according to the traditional economic model.

These consumers are called type 2 consumers and their behavior is described by the equation 2. However, type 2 consumers are insensitive to price. They will buy more of the product as the quality of the product increases regardless of the product's price. Nevertheless, all consumers do face some budgetary restrictions. We will, therefore, assume that this relationship only holds for prices less than p0.

When the price per unit exceeds p0s type 2 consumer will stop buying the product. Market Behavior with Type 1 and Type 2 Consumers We can study market behavior when the market consists of both type 1 and type 2 consumers. If the number of type 1 and 2 consumers is n1 and n2, respectively, then the behavior of the market will be described by equation 3.

Price-Quality Relationships by Steven M. Shugan

The profit margin for this company would be the product's price minus the COSt of adding quality to the product. In order to simplify the exposition we will assume that the cost function is quadratic. Our conclusions rely only on the assumption of a convex cost function.

This assumption implies that as the level of quality increases it becomes more and more costly for the company to obtain additional quality. Eventual perfection is, indeed, difficult to achieve. With a quadratic cost function, it is in the company's own best interest to adopt the price and the level of the quality given by equations 4 and 5respectively.

That relationship is depicted in figure 1. This result is consistent with the empirical work of McConnell, At low prices, small changes in price correspond to large changes in quality. At higher prices, small changes in price correspond to smaller changes in quality. In all cases, however, higher prices correspond to higher levels of the quality.

It is important to remember that we observe a price-quality relationship in the absence of competition between the geographic market segments.

Hence, even without price competition, price levels still reflect the levels of the quality. We can also determine how quality will vary from one geographic segment to another geographic market segment. Equation 5 tells us that as the relative number of type 1 consumers in the segment increases, the level of the quality decreases. Acting in its own best interest, the company will decrease the product's price as the number of price sensitive type 2 consumers increase.

These relationships are depicted by figure 2 and figure 3. Type 3 Consumers In section IIB, we assumed that all consumers who were concerned with the quality of the product were also able to identify that quality. Some consumers, however, may want the quality but these consumers may be unable to determine whether or not the quality is present.

We refer to these consumers as type 3 consumers. We must use care in describing type 3 consumers. It could be argued that a consumer has no need for a quality of the product that the consumer cannot detect. For example, if a consumer cannot discriminate between an ordinary meal and a gourmet meal, we might wonder why that consumer would desire a gourmet meal. Of course, we could argue that the consumer is unfamiliar with the product and cannot easily inspect the product to determine the level of the quality.

But this argument is not very compelling after the consumer has had the opportunity to use the product. At that point, the consumer would have learned the level of the quality. That information, then, could be used in future purchase decisions. Hence, the unfamiliarity argument could only be used for a new product or a durable good whose sales depend mainly on first purchases.

Nevertheless, there remain circumstances when a consumer may desire a quality which the consumer cannot detect. One circumstance might occur when the consumer is only a buyer for another consumer who can detect the quality. For example, a host may be purchasing wine for a party where guests are more discriminating than the host. Another example would be a generous individual who desires to provide a gift for another individual when the gift receiver possesses far more expertise about the gift than the gift giver.

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.

price quality relationship theory and research

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.