Price check: Cost doesn't signal quality

Research finds variation across products in different ranges

If you are thinking of basing a purchase on price alone, think again.

Though many consumers look to the price tag when determining quality, they may not get what they paid for, according to new research from the University of Chicago Booth School of Business.

Price, then, is not the best indicator of quality, write Ann McGill of Chicago Booth, Bart de Langhe of the University of Colorado at Boulder Leeds School of Business, Stijn M.J. Van Osselaer of the Cornell University Johnson School of Management and Stefano Puntoni of the Erasmus University's Rotterdam School of Management.

The paper, "Fooled by Heteroscedastic Randomness: Local Consistency Breeds Extremity in Price-Based Quality Inferences," says that though we tend to generalize across the price spectrum based on what we find at one end, there may be more variation at the other end — for example, for some products, like wines, there is greater variation in quality among lower-priced bottles, so it's possible to get a good bottle of wine for a good price, though basing a decision on cost alone would suggest otherwise. The opposite is true of detergents.

"What we find, though, is that consumers don't pick up on this difference in consistency very well," McGill says. "As a result, if quality is consistent across higher-priced goods, consumers may err and predict that a lower-priced item is lower quality that it really is."

The researchers conducted three studies to examine how people perceive the relationship between price and quality under different conditions — when they had other information on quality in one price region, but not another, for example. They noted that the price-quality relationship is learned two major ways — when price and quality information for many products are simultaneously listed together, for example on websites like Yelp, and about one product at a time, over time.

"The relationship between price and quality is rarely perfect," they write. "The price-quality relationship is characterized by random error around the regression line. Often, this error is not constant across the price range."

McGill says that if consumers learn that quality is consistently high at high prices, they will assume low-price options are worse than they are.

"We find the reverse also — if they learn that quality is consistently low at low prices, they may assume quality is consistently high at high prices, when that might not be the case,” she says. “In some categories, some of the more expensive items might be great but some not so great."

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Contact: Ann McGill is available for further comment at Ann.McGill@chicagobooth.edu.

From: Ethan Grove, Chicago Booth Office of Media Relations, 773.834.5161 (office), 773.420.8670 (cell), Ethan.Grove@chicagobooth.edu.