Where quality cannot be assessed directly, price is read as its proxy, so cutting price can cut demand.
Consumer research. The practical consequence is that price cuts can reduce demand for goods whose quality is unverifiable — wine, consulting, medical services — which inverts the usual demand curve logic.
In practice
- A consultancy that halves its day rate loses enquiries, because the rate was the only quality signal available.
- A wine priced at £7 sells less than the identical wine at £14, and the buyer has no other way to judge.
- Subject
- Economics & Incentives
- Essay
- The regularities money obeys