Price Signaling with Salient-thinking Consumers

Résumé

We study the signaling role of prices in a context of salient thinking. Consumer attention can be directed towards the product attribute - quality or price - that stands out in the market. Products' quality is not directly observed by consumers. Our analysis provides two main results. First, we find that separation is less likely to occur when the salience bias is high. Second, we show that high prices can be due to salience rather than ascribed to a signaling motive, whereas even low prices, when deflated by salience, may serve the purpose of signaling quality. This contrasts the conventional wisdom that a high price signals superior quality. (Joint with Elias Carroni (University of Bologna) and Antonio Minniti (University of Bologna))