How consumers can use price as an indicator of quality
Judging the quality of an unopened bottle of wine can be hard, so many people simply assume that expensive wines are superior to inexpensive ones. But this assumption works better for some products than others, according to Chicago Booth’s Ann L. McGill and her co-researchers.
A product’s quality can vary more at one end of a price spectrum than at the other—and so can the mistakes consumers make when using price as a stand-in for quality. This variation is known as heteroscedasticity. For example, cheap soap is usually low quality, but the quality of higher-priced soap is less predictable. The opposite is true for wine: expensive wine is usually high quality, and the quality varies more when the price falls. The takeaway: a $500 bottle is likely good, but don’t overlook bargains in the discount bin.
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