Joint product signals of quality

Summary The relationship between product quality, signals, and the firm's optimal pricing policy has been given much attention in economics. The literature is extended in this paper by considering the signaling problem of a firm that jointly produces two commodities—one of known quality to consumers (a search good) and one of unknown quality (an experience good). The model presented employs a stylized reputation function, a linear cost structure, and linear demand schedules to produce two interesting insights. First, the search good's price can potentially be used as a signal of the quality of the experience good. Second, the price of a search good will depend upon whether it is jointly produced with another search good or an experience good or whether it is produced in isolation by a single product firm. Furthermore, evidence from a paper on gasoline pricing seems to support this contention.