Price quality relationship theory and research

price quality relationship theory and research

Advances in Consumer Research Volume 11, Pages PRICE- QUALITY RELATIONSHIPS. Steven M. Shugan, University of Chicago. ABSTRACT. examine relationships among product (vehicle) quality, product cost, product The theoretical foundation of this study included product quality and customer. towards one of the ends of the price–quality relationship as can be seen in ous research efforts that have examined different factors that might affect than gains , as posited by the Prospect Theory (Kahneman and Tversky.

The objective of this study is to address and expand upon these concerns. The typical single cue study manipulated prices in a within subjects design.

Subjects, generally students, were asked to make either a brand choice or a quality rating Levitt ; Tull et al ; Lambert; Deering and Jacoby Enis and Stafford and Jacoby et al were not satisfied with the single-cue effect and hypothesized that cues influencing product evaluations e.

Price-Quality Relationships by Steven M. Shugan

To test this hypothesis, multiple cue studies have generally utilized the factorial research design and have analyzed their results by either a fixed model analysis of variance, or when appropriate, a multivariate analysis of variance. For a summary table of the research dealing with price cue effects on product evaluations refer to Olson Olson recognized, however, that the validity of quantitative relationships between price and perceived quality depends heavily on interval scale properties of the quality measure and the assumption that equal price intervals are perceived as equal by the consumer.

Inadequate measures may partially explain some of the inconsistent findings of the price related literature. Stafford and Enis found significant main and interaction effects between product, price and store image. The most interesting result of this study was that the experimental evidence tended to support the hypothesis that the judgment of quality by price can be confounded by nonprice information about the product.

Landon and Schaferand Wheatley and Chiuhowever, did not discover significant interactions in their attempt to replicate the Stafford et al study. 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. 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.

price quality relationship theory and research

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.

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.

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.

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

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.

price quality relationship theory and research

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.

Brain activity, perception, and conscious experience, Donald Hoffman

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.

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.

price quality relationship theory and research