No pain, no gain: A critical review of the literature on signaling unobservable product quality

Abstract

Recent research in information economics has focused on signals as mechanisms to solve problems that arise under asymmetric information. A firm or individual credibly communicates the level of some unobservable element in a transaction by providing an observable signal. When applied to conveying product quality information, this issue is of particular interest to the discipline of marketing. In this article, the authors focus on the ways a firm may signal the unobservable quality of its products through several marketing-mix variables. The authors develop a typoloqy that classifies signals and discuss the available empirical evidence on the signaling properties of several marketing variables. They consider managerial implications of signaling and outline an agenda for future empirical research.