Special Session Summary Signaling Product Quality: the View From Information Economics and Consumer Psychology

Lydia J. Price, Hong Kong Univeristy of Science and Technology
[ to cite ]:
Lydia J. Price (1998) ,"Special Session Summary Signaling Product Quality: the View From Information Economics and Consumer Psychology", in NA - Advances in Consumer Research Volume 25, eds. Joseph W. Alba & J. Wesley Hutchinson, Provo, UT : Association for Consumer Research, Pages: 266-267.

Advances in Consumer Research Volume 25, 1998      Pages 266-267



Lydia J. Price, Hong Kong Univeristy of Science and Technology

Economists and consumer psychologists have long been interested in the mechanisms by which firms can signal unknown product quality to consumers. Despite mutual interest in the topic, however, the research emanating from these two different streams of literature differs markedly in focus and, hence, in the nature of conclusions and findings. Economists try to understand firm behavior and identify signals that differentiate high- and low-quality manufacturers. Their focus on the firm leads to limited exploration of consumer factors that moderate signaling effectiveness. Underlying the economic signaling model, for example, are assumptions of consumer rationality and perfect signal reception. Consumer psychologists, on the other hand, try to understand the processes by which signals alter consumer perceptions and preferences. Their focus on the consumer leads to limited exploration of firm behaviors which moderate signaling effectiveness. Consumer models, for example, make implicit assumptions that signals are clearly transmitted by firms.

The three papers in this session attempt to blend the economic and psychological models of the quality signaling process. From the firm’s perspective, they explore how investments in multiple, complementary signals can enhance the clarity of signal transmission. From the consumer perspective, they examine how judgments of signal credibility can detract from signal reception. Credibility is seen to depend on actions of the firm as well as the likelihood and severity of marketplace penalties for firms who engage in signaling deception. Each paper thus presents a model in which the informational value of a signal is seen to depend on actions by both the consumer and the firm, as well as marketplace conditions. As such, the papers offer a richer view of the quality signaling process than is offered by either economic or psychological theories in isolation.

In addition to enhancing our theoretical understanding of the signaling process, the three papers explore different problems encountered by brand managers. The first paper addresses the problem of measuring brand equity. The second explores the difficulties of introducing a brand extension product. The third examines the difficulties of arranging a brand alliance. The papers illustrate the benefits of the quality signaling perspective for improving our understanding of these issues and enhancing our resultant predictions. As noted by the session discussant, signa credibility is a central construct emerging from this area of research, and more effort is needed to explore its determinants and consequences. At the same time, attempts must be made to clarify the language and concepts applied in individual research projects since authors use different terms to discuss similar ideas. Work is needed to identify the commonalities and differences in these topics.




Tulin Erdem, University of California, Berkeley

Joffre Swait, University of Florida

This paper uses signaling theory, as developed in the economics of information, to propose a perspective for examining the value (or equity) ascribed by consumers to brands. Unlike research based on cognitive psychology, the signaling perspective explicitly considers the imperfect and asymmetrical information structure of the market to motivate the central role of credibility in brand equity development. Credibility is determined endogenously by the dynamic interactions between firms and consumers, as the main determinant of consumer-based brand equity. More specifically, when consumers are uncertain about product attributes, firms may use brands to inform consumers about product positions and ensure that product claims are credible. Thus, brands may signal product positions credibly. Brands as market signals improve consumer perceptions about brand attribute levels, increase confidence in brands’ claims, and reduce uncertainty, thereby lowering consumer perceived risk and information costs, and increasing consumer expected utility. This chain creates consumer-based brand equity. Empirical tests for the main underpinnings of the perspective are conducted via LISREL estimation of the proposed structural relationships. The model is estimated on survey data and the results provide strong support for the proposed perspective.



Lydia J. Price, Hong Kong University of Science and Technology

Niraj Dawar, University of Western Ontario and INSEAD

The results of several empirical studies investigating the influence of warranties on consumer perceptions of product quality show inconsistency in terms of the effect’s intensity as well as its focus along two different dimensions of quality. While earlier researchers have recognized this inconsistency, no unified explanation has been proposed to account for all prior evidence. We propose a model of joint brand and warranty signaling effects that is able to reconcile the prior warranty literature. The model’s key proposition is that joint signaling effects depend on the information content inherent in each signal as well as the credibility of each in conveying that information and the propensity for one signal to enhance the other’s credibility. Variations in signal content and credibility lead to predictable differences in signaling outcomes. Accordingly, the results of numerous prior warranty studies as well as two experiments investigating warranty effects on brand extension evaluations are shown to conform to predictions derived from the proposed framework.



Akshay R. Rao, University of Minnesota

Lu Qu, University of Minnesota

Robert W. Ruekert, University of Minnesota

This article examines the emerging practice of featuring two (or more) brands simultaneously in he same product or product context. There is little theoretical direction or empirical evidence to guide this practice of forming "brand alliances". We propose that one important reason for forming a brand alliance is to "signal" unobservable product quality to quality-sensitive buyers. Results from a 3-factor experiment are largely supportive of the premise and suggest that consumers’ quality perceptions are enhanced when (1) quality is unobservable prior to purchase, and (2) the brand ally is perceived to be vulnerable to consumer sanctions for false signaling, thus making it a credible brand ally. These results are observed when the brand ally is a real brand name and when it is a fictitious brand name. Additional evidence on the consequences of product failure are also discussed as are the theoretical and substantive implications for the area of brand management.