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It is generally believed that as the price of a product increases, its demand decreases. But there is an exception to this general principle. There are situations when the price can act as an indicator of the quality of a product. When this happens, higher price will not necessarily lead to lower demand or sales.
Prices are used as an indicator of quality of product in situation where it is difficult for customer to ascertain the intrinsic physical quality of products, and for prestige products that may be used to enhance prestige of a person in the society. In this way, quality of a product such as dinner at a restaurant may be difficult to define and evaluate - particularly before actually experiencing the service - and therefore price may become an important indicator of quality. Further, the price tag will also determine the kind of people who are likely to dine at the restaurant. In this way a restaurant charging very high prices is likely to carry high prestige in terms of being a choice of the people from higher strata of society. However it must be noted that a higher price tag also raises the expectation of customers, and if the service at the restaurant is not in line with its price tag, its sales are likely to suffer substantially.
When we consider the impact of price on perception of quality of toothpaste, we find that the users are in a much better position to ascertain the quality of toothpaste, as it is used regularly and purchased frequently. Also, the kind of toothpaste a person uses has limited impact on the prestige of the person. Because of these factors, price of toothpaste has limited impact on perception of its quality.
The case of a haircut will lie somewhere between dinner in a restaurant and toothpaste. People know clearly well what kind of haircut they want. Also most of the people prefer to get their haircuts from the same place. This means that they already know the kind of hair cut they will get from a particular service provider. Also the place where a person gets the haircut has less impact on prestige of the person than the places where one goes out for dining. However, the prestige value of the place where one gets haircuts is more than the prestige value of the toothpaste one uses.
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