Quality of an experience good: the interaction of price and advertising as a determining factor

Abstract

This paper analyses the product quality in terms of its price and company’s advertising investment. The central assumption is that the advertising investment of a collective brand member has a positive influence on its product quality until an advertising investment threshold is reached, after which the effect on product quality becomes negative. This change in the slope is explained because consumers perceive advertising effort as excessive, so they wonder if this means there’s a problem with the quality of the product. Advertising investment is curvilinearly related to product quality with a higher slope for products with low price than for those with high price, and positively related to products with moderate price. The results obtained from a sample of Spanish companies that operate in an experience goods industry (i.e. wineries) evidence the proposed relationships. These results reveal the importance of advertising investment for product quality in industries in which the signal of quality is not only reliant on the collective and individual brands; and also suggest the complexities of implementing such investment to get product quality in companies depending on their price.