Association Between Market Price and Seller/Market Characteristics

Over the past 40 years an extensive literature has emerged addressing association between price and quality. In an article surveying the first 35 years (1950-1985) of this literature, Geistfeld (1988) concluded that the evidence supporting association between price and quality to be weak. In a study examining the association between used car reliability and price, Ginter, Young, and Dickson (1987) found that reliability was not reflected in price. Bodell, Kerton, and Schuster (1986), using Canadian data, found a weak association between price and quality. Hjorth-Andersen (1987) concluded that it is not generally wise to purchase the most expensive model to reduce the risk associated with the purchase of a product. Price/quality research has typically ignored the unique aspects of specific markets, differences types of retailers, and ancillary seller services. The importance of market characteristics was recognized by Sproles (1977) who noted that there may be variability in prices and models avaialable in local markets because of market-related factors such as size and number of competitive retailers, size of the trading area, and local economic conditions. In an analysis of three markets Geisfeld, Maynes, and Duncan (1980) found that markets differed with respect to number of seller for a given model and number of models for a given product; however, it was not clear if one market was systematically more "expensive" than another. The possible effect of seller characteristic on the association between price and quality has been looked at in several studies. The evidence, however, is conflicting. Duncan (1981) noted that if seller characteristics were associated with price, one would expect hihg service stores to have consistently higher prices and low services stores to have consistenly lower prices for all models. Analysis of the data revealed this was not the case. Examining five store types Geistfield (1982) found average Spearman correlation coefficients between price and quality to rage from - .14 to .65. This suggest that seller characteristics may affect the association between price, and quality. Ginter, Young, and Dickson (1987) recognized the possible effect of seller characteristics when they noted the National Automobile Dealers Association (N.A.D.A.) used car prices could reflect elements other than reliability--perhaps seller services. If seller/market characteristic are a significant part of the set of characteristics consumers purchase and are reflected in the price paid for a product, studies relating price of a good to measure of quality not reflecting seller/market characteristics may not reflect what happens in a given market. While the need to be sensitive to seller/market characteristics has been recognized in the price/quality literature, there has been no systematic effort to ascertain whether seller/market characteristics are reflected in product prices. The research reported here is a first attempt to directly focus on the association between seller/market characteristics and price. SELLER/MARKET CHARACTERISTICS AND CONSUMER PURCHASE DECISIONS When purchasing an item, consumer buy the product per se and a set of seller services. A "high service" retailer would provide, in addition to the product, an environment in which product repairs are easily and correctly made, returns are handled with mininal hassle, sales personnel are knowledgeable, etc. A "low service" seller may provide no more than the actual product. Numerous seller characteristics exist that could affect market price of a given product model. These range from the types of services retailers offer to the physical environment of a store. In particular, they include Return Policy. Offering flexible requirements with respect to proof of purchase and a relatively long-time period over which replacement/exchange is honored; Warranties. Offering warranties directly or handling manufacturer warranties; Repair Service. …