The Economics of Quality, Grades and Brands (Routledge Revivals)

Peter Bowbrick

• Publisher: Taylor & Francis
• Year: 2014
• Print ISBN: 9781138793224
• eBook ISBN: 9781317645047
• Edition: 1
• Topic: Business
• Subtopic: Advertising
• Index: Business

Virtually every decision to produce, buy or sell is influenced by quality, yet until this book was first published in 1992, there had been very little attempt to produce a comprehensive and practical theory for this. Here, Peter Bowbrick brings together different traditions of quality analysis from economics, marketing economics and marketing itself to identify the limitations of the different traditions of quality economics and some approaches to its analysis. Beginning with a definition of the subject and the concepts involved, this comprehensive title will be of particular value to students of Economics, Marketing and Business Studies.

Chapter 1

What is quality?

DEFINING QUALITY

Everybody believes that ‘Quality is a Good Thing’, but nobody is terribly clear what they mean by quality. We all use the word in very different senses from time to time, and it is only too easy to switch from one meaning to another and then back again in a single sentence without noticing it. This causes confusion. It also causes serious misunderstandings and conflicts when groups of people are using the word in different senses, when the marketing division is pressing for one kind of quality, while the production division is striving to produce another, or when customers want one kind of quality and the firm is trying to provide another. When both sides of an argument are striving for quality, but do not realize they are talking about something different, they suspect each other of bad faith, and this can seriously damage the efficiency of a firm.

Many people get a large part of their job satisfaction from the knowledge that they are producing excellent products. There can be a strong, and understandable, emotional reaction if they are asked to produce a product that is third rate in their terms. This can cause serious conflicts, many of which can be avoided by using a more specific definition of excellence. For example, if the plant breeder can be brought to think that an excellent strawberry is one that the consumer wants to buy, rather than one that is disease resistant, resistant to bruising, storable, and with a long shelf life, he can change his objectives to include flavour and aroma. All too often scientists think there is something vaguely discreditable (‘rather like advertising or selling double glazing door to door’) in producing what consumers want rather than ‘what they ought to want’. Even if they cannot be brought to believe that the marketing department is right, they can be brought to understand the marketing department’s point of view.

In this chapter some of the concepts of quality will be examined, and their differences brought out. I have selected eight concepts, based mainly on who is using the concept – self-evident, inspector-based, user-based, buyer-based, distributor-based, producer-based, input-based and product-based.¹ The distinctions have an arbitrary element and do overlap to some extent, so other classifications are possible. It is important to note, though, that I am not pushing any one approach as the right one, and still less am I going to attempt to define quality in a way that makes it easy to model mathematically. The fact that a concept is hard to model does not mean that it can be ignored.

Quality is self-evident

‘It is self-evident what quality is. You cannot define it, but you know it when you see it.’ When this statement is made, it may just mean that the speaker has not given any thought to what he means by quality. He may, however, mean exactly what he says in this context. I can recognize a Rubens as having an innate excellence, and I will let my taxes be used to ensure that it stays in a British Museum, but I will never visit that museum, and I would not have a Rubens on the wall of my house. I can recognize that Jane Austen is excellent, and demand that other people’s children should be forced to read Persuasion, even though I read thrillers myself. I can recognize that a Rolls Royce is far superior to the latest Metro, while accepting that it would be commercial suicide to produce the Metro to Rolls Royce standards. I can recognize that, in some sense, round, brightly coloured, unblemished tomatoes are excellent, in spite of their thin coating of insecticide, and lack of flavour.

Inspector-based

Government inspectors, EEC bodies, consumer organizations and, not least, the quality control departments of factories, have an idea of quality which is seldom the same as anyone else’s. This may be partly because they have not thought through the question of what quality they want to inspect for and why. It may be because they fail to realize that there is a relationship between quality and price, or that people do not always buy the quality they say they prefer. It may be because they are trying to provide people with what is good for them. Often it is because they are trying to take into account the quality objectives of a wide range of interested parties, the factory managers, the marketing departments, the retailers and the consumers. Inevitably, any attempt to take everybody’s ideas into account produces a hybrid ‘inspectors’ quality’ which is nobody else’s.

Inspectors are also faced with the problem that they have to define quality in terms of measurable, objective characteristics that can be used in statistical quality control. Taste, beauty and feel cannot be measured directly, so quality must be redefined in terms of other characteristics. (Would the Venus de Milo have passed quality control?) The results are usually a definition of quality that is odd, but workable in their terms. The danger is that, as has happened often in the past, this odd definition has come to be accepted as the quality we should be aiming for.

It is easy to laugh at some of the excesses of inspector-based quality, but some economists are guilty of exactly the same error. It will be shown in later chapters that one or two of the concepts of quality used by economists have been chosen and elaborated with the single objective of being easy to manipulate in a mathematical model. They are even more restrictive than the inspectors’ quality. The danger here is that economists trained in this tradition will accept a concept of quality that bears no relation to the concepts used by anyone else, and which is totally unrealistic.

User-based

User-based concepts of quality are based on products meeting a need. Someone who is hungry can meet that need in many ways, using different products, even when that hunger has crystallized into such a precise form as ‘I want to eat a bar of chocolate’. Here a great many product lines can meet a need, and ranking them in order of quality is at the fancy of the individual.

At the same time, a single product line can meet different satisfactions. A Mars Bar may satisfy hunger, it may give oral satisfaction, it may substitute for love and affection, it may be a reward to a child for keeping quiet while her father is talking, it may be part of the experience of going to the circus, or it may be one child’s superiority over his friend, who only has chewing gum. Here one product line can be many different ‘goods’ each with different substitutes. The quality of the Mars Bar compared with other products depends on which satisfaction is the goal. Even so, the product may be providing several satisfactions at once, so a product that is moderate in several respects may be preferred to one that is excellent in only one. Similarly, two products may be consumed jointly, either as substitutes or as complements, to produce a single satisfaction.

As users vary in their preferences and financial situation, they can be expected to have different optimum choices, even for simple goods (the theoretical single-characteristic product with a single use, for instance), and these preferences can be expected to vary over time. In fact, there is no reason to believe that any two people have the same preferences for goods, and if by chance they should have, their financial position is sure to be different. This means that it is seldom possible to say unequivocally that one product is better for all consumers, and even less often possible to say that it would be the best buy at that price. Marketing recognizes the importance of this diversity, and a main thrust of consumer research is to find identifiable groups of customers (segments) whose tastes differ from those of the majority.

User-based concepts of quality, unlike inspector-based concepts, recognize that consumers may not get their satisfactions from the objectively measurable characteristics of a product, and they may not base their purchases on them. This is partly because consumers generally cannot identify or measure characteristics at the time of purchase, and often cannot identify or measure them at the time of consumption (when consuming vitamin pills for instance). It recognizes that some goods are bought on entirely imaginary attributes like ‘luck’ or ‘miracle ingredients’. Others are bought for ‘beauty’, ‘style’, ‘flavour’ or ‘social acceptability’ – and I do not suggest that these are not real or important just because they are not objectively measurable. They are part of user quality.

These concepts are basic to advertising, and are a recognized part of market research, where a product is tailored to meeting consumer tastes. They appear intermittently in marketing economics, and are generally ignored in economics derived from utility theory.

Buyer-based

The buyer-based concepts of quality recognize that the person who buys the product may not be the person who uses it, as a home-maker buys the food for all members of the family, including himself, as governments buy public goods, and as procurement departments buy for firms. Most goods are bought for someone else, or, at least, by a home-maker buying for the family at the same time as he buys for others.

The home-maker who is trying to produce a meal satisfactory to all members of the family, or who is trying to buy consumer durables to meet the demands of all members of the family will not act as though the demand function was a simple addition of the demands of the users. The outcome may be a bland solution that pleases no one, but annoys no one.² Alternatively, preferences may be weighted by some criterion such as which child screams loudest. Some home-makers buy the products they like themselves; others, self-sacrificingly, buy only what other people like. The solution is not likely to be a mathematical function of the demands of the users.

The users, the children, may not feel that they face any of the financial or logistical constraints that the buyer does, and so they may ignore price and value for money when pressing the buyer to buy one quality rather than another. A similar problem arises with public goods, where the general public has a concept of quality which may be very different from that of the public official who procures the goods.

The home-maker also gets important satisfactions out of the buying process, the satisfaction of making a ‘good buy’, of reaching a satisfactory resolution of a difficult management and logistic problem, of being essential to the family’s well-being, of his contribution being recognized. The purchase of special foods, wholefoods for instance, and the preparation of special dishes may be satisfying these needs and may in fact be contrary to the wishes of his family who want junk food. Marketing and advertising practitioners work on this with advertisements showing that a caring home-maker protects the family with margarine made of polyunsaturated fats, rather than trying to persuade the eventual consumers that they like it.

Purchases are determined partly by direct satisfactions arising from the buying activity, and partly from indirect satisfactions of the user (including the home-maker as well). Depending on the product and the market, the indirect satisfactions may be of very little importance indeed, or they may be the main determinant of the purchase.

Most marketing statistics cover what buyers actually purchase, not what the eventual users would like them to buy, so economists tend to work at this level for market analysis, calculation of elasticities, and so on. Formally, analyses using utility theory are concerned with what the buyer purchases, but it is almost universally assumed that the buyer is the user. This is a serious cause of confusion in utility-based quality theory, as will be shown in later chapters. Marketing and advertising often recognize the importance of the distinction, though not as often as one might expect.

Distributor’s quality

To the wholesaler and retailer, quality may have a whole new set of connotations.

A quality good is one which increases the store’s prestige, even if they do not sell much of it. Safeway, for instance, sells a few bottles of wine at £67 a bottle to improve the reputation of their wine department, their store and, less directly, to boost their share price.

A quality good gives no trouble. It comes when ordered, and it can be ordered at short notice. It need not be checked on delivery, there is no shrinkage, and it can take rough handling. There are no dissatisfied customers. A quality good is cheap to handle. It has a long shelf life and no waste. It takes up very little shelf space or aisle space.

A quality good gives high turnover at a good margin. This is partly determined by the buyer’s perception of the quality of that good, but also by the whole policy of the shop – ambience, pricing policy, reputation, location and so on, rather than by the quality of that product alone.

Much of the value of a product can arise from its ability to meet these requirements of the distributor. It can be argued that a large part of the pay-off from grading schemes and minimum quality standards arises in this way. If the standards were designed with distributor quality in mind, rather than with a hotchpotch of user quality, inspector quality and self-evident quality, as is often the case, they would be a great deal more effective than they are now.³

The relative importance of the direct aspects of quality, such as the handling costs, and the indirect effects arising out of buyers’ and users’ satisfactions will vary according to the product and the market. For example, one fruiterer with a shop outside a hospital sells mainly to buyers who give presents to users, the...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Copyright Page
• Table of Contents
• List of figures
• List of tables
• Introduction
• 1 What is quality?
• 2 The product as a variable
• 3 What are brands and grades?
• 4 What is search?
• 5 Brands as search
• 6 Sorting
• 7 Uniformity
• 8 Grades and search
• 9 Compulsory minimum standards: good or bad?
• 10 Price as an indicator of quality
• 11 Market effects
• 12 The costs of producing quality
• 13 The time dimension
• 14 Subjective attributes and objective characteristics
• 15 Errors in characteristics theory
• 16 The misuse of hedonic prices and costs
• 17 Approaches to the economics of quality
• Notes
• Bibliography
• Name index
• Subject index