Price as a signal of product quality: Some experimental evidence∗

We separate the budgetary and non-budgetary effects of price on demand using choice data from wine tasting experiments in which consumers tasted wines of differ-ent quality accompanied by fictitious price information. The non-budgetary effect is present and nonlinear: it is strongly positive between e 3 and e 5, and undetectable between e 5 and e 8. We find a similar nonlinear price-quality relationship in a large sample of wine ratings from the same price segment, supporting the hypothesis that consumer behavior in the experiment is consistent with rationally using prices as sig-nals of quality. Price signals also have greater importance for inexperienced (young) consumers