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Price as a Signal of Product Quality: Some Experimental Evidence*

Published online by Cambridge University Press:  03 July 2014

Giovanni Mastrobuoni ,
Franco Peracchi  and
Aleksey Tetenov
Giovanni Mastrobuoni
Affiliation:
Department of Economics, University of Essex and Collegio Carlo Alberto; e-mail: gmastrob@essex.ac.uk.
Franco Peracchi*
Affiliation:
Tor Vergata University and EIEF, Rome, Italy
Aleksey Tetenov
Affiliation:
Collegio Carlo Alberto, Moncalieri, Italy; e-mail: aleksey.tetenov@carloalberto.org.
*
(corresponding author). e-mail: franco.peracchi@uniroma2.it
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Abstract

We use experimental data to disentangle the signaling and budgetary effects of price on wine demand. The experimental design allows us to isolate the two effects in a simple and intuitive way. The signaling effect is present and nonlinear: it is strongly positive between 3 euros and 5 euros and undetectable between 5 euros and 8 euros. We find a similar nonlinear price–quality relationship in a large sample of wine ratings from the same price segment, supporting the hypothesis that taster behavior in the experiment is consistent with rationally using prices as signals of quality. Price signals also have greater importance for inexperienced (young) consumers. (JEL Classification: D11, D12, D82)

Keywords

pricingproduct qualitysignalingwine ratings
Type
Articles
Information
Journal of Wine Economics , Volume 9 , Issue 2 , August 2014 , pp. 135 - 152
Copyright
Copyright © American Association of Wine Economists 2014 

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Footnotes

*

We thank Karl Storchmann and two anonymous reviewers for their comments. We also thank Iván Fernández-Val, Ignacio Monzón, Andrea Pozzi, and participants at the 2011 AAWE Annual Conference for helpful discussions. Finally, we are grateful to Diego Tomasi, Rosa Arboretti Giancristofaro, Vasco Boatto, Livio Corain, Luigi Salmaso, and Tiziano Tempesta for providing their experimental data and to Altroconsumo for the data from their 2006–2012 wine guides.

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