Some Evidence on Prices as Signals of Quality

Abstract. Theory indicates that prices may serve as signals of unknown product quality. The relevant implication is that prices remain above marginal cost. Price signaling may also occur when buyers have a return option or money-back guarantee. Intuitively, sellers that deviate from a price that conveys full information by setting a higher price will have their products returned and suffer losses. Absent in the literature are any empirical studies to support the theoretical findings. This paper provides empirical results from an online used computer exchange to offer support for the theory of price signaling. The data are consistent with the theory but more research is needed