Signalling Service Quality through Price and Certifications

Signalling quality in the service domain and finding optimal strategies for the same have not been explored well in marketing literature. The study proposes a price–certification combination strategy to signal the service quality when the quality level remains unobserved by the consumers. Theoretical modelling has been done in a duopoly setting to determine the possible separating and pooling equilibriums when there is a possible long-term effect of low-quality belief. The separating equilibrium shows that the low-quality firm will not opt for certification and its price will depend on its quality distance from and the price of the high-quality firm. The high-quality firm’s certification costs will also depend on the quality distance of the two firms, its price level and the possible future effects of not participating in the certification programme. The range of possible certification costs of the high-quality firm increases as the future loss of not being certified increases. Moreover, as the quality difference between the firms increases, the high-quality firm can reduce its certification costs and after some level can actually signal only by its high price without any certification. The polling equilibrium of the analysis shows a Bertrand equilibrium, where both the firms set their price and certification costs to zero. The implications and future research directions are suggested in the article.