Quarterly Journal of Economics Vol. 98 No. 4 1983
Premiums for High Quality Products as Returns to Reputations
Abstract
This paper derives an equilibrium price-quality schedule for markets in which buyers cannot observe product quality prior to purchase. In such markets there is an incentive for sellers to reduce quality and take short-run gains before buyers catch on. In order to forestall such quality cutting, the price-quality schedule involves high quality items selling at a premium above their cost. This premium also serves the function of compensating sellers for their investment in reputation. The effects of improved consumer information and of a minimum quality standard on the equilibrium price-quality schedule are studied. In general, optimal quality standards exclude from the market items some consumers would like to buy.
- DOI
- 10.2307/1881782
- Volume
- 98
- Issue
- 4
- Pages
- 659
- Sources
- openalex crossref