Price as a signal of quality: Canada in the international context

Studies have demonstrated that price is correlated very poorly with quality. The methodological criticisms of the earlier work are discussed, and it is found that the original results remain robust. An examination of 91 sets of Canadian products containing 1,020 items reinforces the conclusions of earlier work for the US and Japan. These international studies contradict the conventional wisdom that price is a sufficient signal of quality. Tests also are made of the hypotheses that price is a better signal of quality: 1. after product tests have been published, and 2. for higher priced items that presumably justify larger investments in ''search.'' The Canadian data do not support either theory. These observations do not fit well with the unique price-quality equilibrium given by supply-demand analysis, but they are consistent with Mitchell (1912).