The Price-Perceived Quality Relationship: Evidence from U.S. Cheese Markets
Presented by:
Charng-Jiun Yu
Department of Agricultural & Applied Economics
University of Wisconsin - Madison
Wednesday, March 27, 2019
12:00 pm-1:30 pm
Taylor-Hibbard Seminar Room (Rm103)
In this paper I examine how price as a quality indicator impacts consumer choice. I develop a mixed logit model with behavioral conditions to decompose the price effect into two channels: (i) the negative channel that affects the cost of obtaining the product and (ii) the positive channel that affects the perceived quality of the product by consumers. My objective is to answer the following three questions. First, what is the marginal effect of price on the choice probability through the channel of perceived price-quality relationship? Second, how does the impact on perceived quality change over repeat purchases? Third, how would the market outcomes and consumer welfare change if consumers no longer use price as an indicator of quality? Using the Nielsen household panel and retail scanner data for U.S. retail cheese markets from 2011 to 2015, I find that a $1 per pound increase in cheese price leads to a 2.9% decrease in choice probability on average. This overall marginal impact consists of a 7.3% decrease from the negative channel and a 4.4% increase from the positive channel. My result also suggests that the price-quality impact decreases after repeat purchases.