Question

Question:Many consumers view a well-known brand name as asignal of quality and will pay more for a brand-nameproduct (e.g., Bayer aspirin instead of generic aspirin,or Birds Eye frozen vegetables instead of the supermarket’sown brand). Can a brand name provide auseful signal of quality? Why or why not?

Short answer

The brand name acts as the signal of quality since it removes the problem of asymmetric information; the producer incurs a huge cost on the advertisement to create a brand name that depicts it as of higher quality.

Step-by-step solution

Brand names as a signal of quality

Brand names are a very good signal of quality. A brand name removes the asymmetry in the information between buyers and sellers. Since a customer is generally unaware of the quality of the various similar but differentiated products in the market, the brand's name helps them develop trust and buy a product whose quality is guaranteed by the company.

The producers usually incur a huge cost for advertisement and marketing, which helps them spread awareness about the brand. Aproducer will never incur a huge sum to sell a bad-quality product. This would not help them in retaining their customers, and it will be an unnecessary cost. Therefore, advertising is mostly done to promote the sale of good quality products.

Thus, a brand name created through advertising signals a good quality.