Price and Quality Relationships in Local Service Industries

Authors:
R. Dennis Murphy
Working Paper:
249

This working paper presents the findings of research on the relationship between price and quality in consumer service industries in the Washington, D.C. area. The study relies primarily upon consumer ratings of service provider quality and other data published in Washington Consumer’s Checkbook Magazine. The data base includes nineteen service industries and, in virtually all cases, time series information for price and quality ratings over several ratings periods since the magazine’s inception in 1976. The results provide interesting and frequently surprising information on basic price-quality relationships in this sector, and on the reliability of several non-price "signals" that consumers might use to gauge a service provider’s probable performance. Specifically, only three of the nineteen industries report consistently significant positive price-quality correlations, and industries specializing in repair services frequently display significant negative correlations between price and quality. Further, possible signaling mechanisms, such as the size of a firm’s Yellow Pages advertisement, or a firm’s status as a member of a nationwide chain, do not function as indicators of higher quality in this data set.