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Price as an Indicator of Quality: Implications for Utility and Demand Functions

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  • Ding, Min
  • Ross, William T.
  • Rao, Vithala R.

Abstract

Consumers often infer quality information from prices and rely on their reference prices. This paper incorporates both behavioral regularities into the classic utility function. The analytical investigation reveals five qualitatively different types of consumers, three of which are relatively new to modeling literature. The authors test the model's theoretical insights using a new experimental method, random allocation of scarce inventories (RASI), which is designed to align people's incentives, such that they state their true rank order preferences. The results support the existence of five different types of consumers; the authors discuss the managerial implications for pricing strategies.

Suggested Citation

  • Ding, Min & Ross, William T. & Rao, Vithala R., 2010. "Price as an Indicator of Quality: Implications for Utility and Demand Functions," Journal of Retailing, Elsevier, vol. 86(1), pages 69-84.
    • Handle: RePEc:eee:jouret:v:86:y:2010:i:1:p:69-84
    DOI: 10.1016/j.jretai.2010.01.002
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    References listed on IDEAS

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    3. James Agarwal & Wayne DeSarbo & Naresh K. Malhotra & Vithala Rao, 2015. "An Interdisciplinary Review of Research in Conjoint Analysis: Recent Developments and Directions for Future Research," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 2(1), pages 19-40, March.
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    10. Mukherjee, Amaradri & Jha, Subhash & Smith, Ronn J., 2017. "Regular Price $299; Pre-order Price $199: Price Promotion for a Pre-ordered Product and the Moderating Role of Temporal Orientation," Journal of Retailing, Elsevier, vol. 93(2), pages 201-211.
    11. Asmussen, Christian Geisler & Hashai, Niron & Delios, Andrew, 2022. "The coevolution of international scope and technological knowledge in MNCs," Journal of World Business, Elsevier, vol. 57(1).
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