Price as an Indicator of Quality: Implications for Utility and Demand Functions

Consumers often infer quality information from prices and rely on their reference prices. This paper incorporates both behavioral regularities nto the classic utility function. The analytical investigation reveals five qualitatively different types of consumers, three of which are relatively new o modeling literature. The authors test the model’s theoretical insights using a new experimental method, random allocation of scarce inventories RASI), which is designed to align people’s incentives, such that they state their true rank order preferences. The results support the existence of ve different types of consumers; the authors discuss the managerial implications for pricing strategies. 2010 New York University. Published by Elsevier Inc. All rights reserved.