Does price equal quality?

A story by Paul de Grauwe in the Financial Times last week included this interesting study on the effects of pricing:

A few weeks ago an interesting experiment was undertaken at the Brussels food fair, a yearly affair where food lovers wander around among the many stalls stuffed with all imaginable delicacies. A stall was put up selling boxes of Belgian chocolates. The first day the price was set at Euros 9 for each box. Sales went well. The next day the price was raised to Euros 15 per box. Steeped in economic theory, you might think that demand now declined. Wrong. Demand doubled. On the third day the price was lowered to Euros 2 for each box. Demand for chocolates collapsed. What went wrong with the law of demand?

The explanation is given by psychologists. It is very difficult, if not impossible, for the consumer to find out the quality of chocolates by just looking at their appearance in the shop. When confronted with such uncertainty about the intrinsic value of things, consumers use simple rules of thumb that they understand. Psychologists call these “heuristics.” In this case, the price of the chocolates provides the rule of thumb.

Most consumers have some experience that allows them to associate high price with high quality. It is not always like that, but on average it probably is. Thus when looking at the Euros 15 box the consumers infer that the high price reflects high quality and they buy the chocolates. Consumers who see the boxes priced at Euros 2 infer that the quality of these chocolates is not to be trusted, and they do not buy them. The law of demand is turned upside down.

Stephen Beaumont made this same point in a story I wrote for All About Beer Magazine last summer – How much should you pay for beer?, saying:

“To the American consumer in particular, price tends to equal quality. Charging higher prices for beer is a) a means of garnering respect from the average consumer; b) a path out of the cheap six-pack ghetto of mainstream beers and a point of differentiation; and c) a way to reflect the quality of ingredients, rarity and amount of knowledge, effort and risk that goes into the creation of some beers.”

I agree that many better quality beers are underpriced, but I can’t agree that price is a reliable indicator of the quality of a beer.

So what’s a beer drinker to do? Sometimes you can turn to critics before buying a more expensive beer, if you trust them and they’ve had the particular beer you are considering. (Note, I occasionally fill the role of critic, but we’re only talking about tasting four beers every other month of All About Beer Magazine.)

Or you can look at online beer rating sites, the largest being Beer Advocate and Rate Beer.

But what happens when . . . you open a 750ml bottle that cost $10, as we did last week, and totally inappropriate diacytel (butterscotch) is apparent? Part one is easy: We know what’s in our glass isn’t a good beer. What we want to know is if this is true of other bottles, if we should consider trying it again.

So I look online and don’t find a “trusted critic” who has notes on the beer. Meanwhile, it gets generally high marks on the beer rating sites – and those who don’t like it don’t mention diacytel. However, in an e-mail discussion with a local friend he mentions he bought a bottle and found the diacytel overwhelming. Thinking it might be a local problem I checked in with a friend on the East Coast. Whoops – he had the same experience.

Where’s this going? Nowhere, I’m afraid. Except to note that if this beer reappears on local shelves costing $2 more I won’t be assuming the brewer has cleaned up the diacytel issue.