Joint product signals of quality

The relationship between product quality, signals, and the firm's optimal pricing policy has been given much attention in economics. The literature is extended by considering the signaling problem of a firm that jointly produces 2 commodities, one of known quality to consumers (a search good) a...

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Bibliographic Details
Published in:Atlantic economic journal 1991-12, Vol.19 (4), p.38-41
Main Authors: McClure, James E., Spector, Lee C.
Format: Article
Language:English
Subjects:
Comparative studies
Consumer goods
Economic models
Economic theory
Effects
Joint products
Pricing policies
Product management
Quality
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Summary:The relationship between product quality, signals, and the firm's optimal pricing policy has been given much attention in economics. The literature is extended by considering the signaling problem of a firm that jointly produces 2 commodities, one of known quality to consumers (a search good) and one of unknown quality (an experience good). The model presented uses a stylized reputation function, a linear cost structure, and linear demand schedules to produce 2 interesting insights. First, the search good's price can potentially be used as a signal of the quality of the experience good. Second, the price of a search good will depend upon whether it is jointly produced with another search good or an experience good or whether it is produced in isolation by a single-product firm. Futhermore, evidence from research on gasoline pricing seems to support this contention.
ISSN:0197-4254
1573-9678
DOI:10.1007/BF02299119