What is in a price? Evidence on quality signaling for experience goods

We study the effect of quality disclosure on prices using quality tests released by the main consumer protection agency in Germany. Both durable and non-durable consumer products are covered, representing about 5 percent of weighted expenditures for all products in the German CPI. Cross-section results of the price-quality relation before quality disclosure show that higher prices are positively correlated with higher quality for durable goods, and negatively correlated for non-durable goods; both results are in line with theoretical models of price signaling. In the dynamic analysis, we employ a RD-type approach around publication of the quality evaluation for identification. Results show a positive effect of quality disclosure on prices for high quality durable products and a negative effect for low quality products suggesting that the information improves matching. Opposite results hold for non-durable products. Survival estimates show that products of low quality leave the market earlier.