Can High Prices Ensure Product Quality When Buyers Do Not Know the Sellers' Cost?

Indiana University, BEPP Working Paper No. 99.007

25 Pages Posted: 29 Sep 1999

See all articles by Eric Bennett Rasmusen

Eric Bennett Rasmusen

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Timothy Perri

Appalachian State University - Department of Economics

Date Written: July 27, 2000

Abstract

The Klein-Leffler (1981) model of product quality does not explain why high-quality firms would dissipate the rents they earn from quality-assuring price premia, and it relies on consumers knowing the cost functions of firms. In the present paper, consumers do not know any firm's cost of producing quality goods, so high-quality firms must engage in conspicuous spending to demonstrate they earn a profitable mark-up over cost. Complete rent dissipation occurs only when high and low cost firms have the same cost of producing low quality.

JEL Classification: C72, L15

Suggested Citation

Rasmusen, Eric Bennett and Perri, Timothy, Can High Prices Ensure Product Quality When Buyers Do Not Know the Sellers' Cost? (July 27, 2000). Indiana University, BEPP Working Paper No. 99.007, Available at SSRN: https://ssrn.com/abstract=170790 or http://dx.doi.org/10.2139/ssrn.170790

Eric Bennett Rasmusen

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

2810 S Dale Ct,
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HOME PAGE: http://rasmusen.org

Timothy Perri (Contact Author)

Appalachian State University - Department of Economics ( email )

Boone, NC 28608
United States

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