Price and quality don’t always correlate directly, but consumers often have a hard time separating the two, according to a new study by The University of Chicago Booth School of Business.
Consumers tend to equate low prices with low quality and high prices with high quality, but the correlation is not always consistent, the report noted. Consumers, however, don't always realize that.
"What we find, though, is that consumers don't pick up on this difference in consistency very well," said Ann McGill, professor at The Booth School of Business and co-author of the report. "As a result, if quality is consistent across higher-priced goods, consumers may err and predict that a lower-priced item is [of a] lower quality than it really is."
To test consumers' reactions to the relationship between price and quality, the researchers conducted three studies with various conditions. For example, in one study, participants had other information on quality in one price region, but not in another. [ ]
Researchers found that people learn about the price-quality relationship in two major ways: by experiencing products one at a time over a period of time, and by having access to pricing information about many products simultaneously — perhaps, for example, through review websites like Yelp. But the price-quality relationship is rarely perfect and is often characterized by random error, according to the report.
Despite this inconsistency, many people still make purchases strictly based on cost — and that can cost them in the long run.
"If [consumers] learn that quality is consistently low at low prices, they may assume quality is consistently high at high prices, when that might not be the case," McGill said. "In some categories, some of the more expensive items might be great, but some [might] not [be] so great."
McGill noted that the opposite is also true. Consumers who assume that high prices indicate high quality will likely also assume that low-price options are worse than they are, she said.
The report, entitled "Fooled by Heteroscedastic Randomness: Local Consistency Breeds Extremity in Price-Based Quality Inferences," was co-written by Bart de Langhe of the University of Colorado at Boulder Leeds School of Business, Stijn M. J. Van Osselaer of the Cornell University Johnson School of Management and Stefano Puntoni of the Erasmus University Rotterdam School of Management.
Originally published on Business News Daily.