, Volume 136, Issue 4, pp 491-507

The relationship between price and quality in the marketplace

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Summary

In a competitive market one might expect a strong positive relationship between price and product quality. This paper reports the results of an empirical investigation into the strength of the price-quality relationship. The data set consisted of 413 product tests, involving 6580 brands, published inConsumentengids from 1977–1986. For most products the relationship between price and quality was weak. Hypotheses were developed and tested to explain the variation of price-quality correlations across products. Further, price-quality correlations were found to be lower when the inflation rate was relatively high. It was concluded that, in general, price appears to be a poor market signal of quality.

The author wishes to thank two anonymous referees for giving valuable comments on a previous draft of this article.