Signalling product quality: When is price relevant?

Abstract Price has long been regarded as performing a dual role in the demand for products with unknown quality. It represents the opportunity cost of the product and is one of several signals which indicate quality. We argue that when quality signals are stochastic not all of them will be used. In particular, there will be a critical price above (below) which price is used (not used) to signal quality. At this price an individual's demand curve will be characterised by a ‘reverse kink’. This helps explain recent results from demand analysis, including those reported by Abbe-Decarroux in this journal.

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