Summary: What Signal Are You Sending? How Website Quality Influences Perceptions of Product Quality and Purchase Intentions (Wells et al. 2011)

Signaling theory has been widely used in the world of marketing. A study by Wells et al. (2011) attempted to use signaling theory in e-commerce marketing channel. This study applies the theoretical framework of the signal to provide a foundation for understanding how the quality of a website can reduce consumer skepticism that sometimes exist in evaluating products online. Signal is a clue (cue) that allows sellers to convey product quality information that cannot be observed buyers.

Signal is divided into extrinsic and intrinsic cues. Intrinsic cues are characteristics attached to a product, if changed could affect the nature of the product as a whole (e.g., komponen2 in a PC). Extrinsic cues are product attributes that are not attached, if changed will not change the nature of the product (e.g., brand, retailer reputation, price, warranty, store environment). Extrinsic values ​​are easier to observe, knowing that consumers have lack of knowledge of intrinsic attribute of a product. Therefore, optimization of extrinsic cues can influence consumer perceptions of product quality and subsequently affect purchase intentions.

Extrinsic cues also have a major role in influencing consumer perceptions of the quality of products sold online because of information asymmetries. Information asymmetries are associated with the barriers for consumers to evaluate the product directly. Information asymmetry highly occurs in experience-good (products that require direct evaluation before purchase, such as clothes, bags, food, etc.).

Study by Wells et al. (2011) made the quality of a website as an extrinsic cues for products sold on a website. They conducted 3 studies: (1) to check the validity and feasibility of the quality of a website to serve as a signal of product quality, (2) influence of product asymmetries of information when manipulating the quality of the website as a signal of the quality of the product, and (3) effects of signal credibility.

Based on the studies conducted, the quality of the website met criteria to be viable to use as signal of product quality. In particular, the quality of the website is informative guide to be extrinsic cue of the product and the most effective when two conditions are met: (1) high information asymmetries and (2) high signal credibility.

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What Signal Are You Sending? How Website Quality Influences Perceptions of Product Quality and Purchase Intentions (Wells et al. 2011)

Define Customer Satisfaction's Concept (Summary of Mankiw's)

Consumer choice to choose from the various combinations of goods doesn’t only depend on budget constraints, but also on the preference for items. Consumer preferences allow him to choose different combinations of two goods, such as Pepsi and Pizza. If a customer is offered a choice, he would choose the combination that best suits his taste. If both combinations are equal to his taste, it can be said that the consumer indifference to the two combination.

Consumer preferences can be represented by the indifference curve, which shows the combination of Pepsi and Pizza which promote equal satisfaction to the consumer.

Indifference Curve

Movement Along an indifference curve

Consumers are said to be indifferent to the combination of A, B, and C because the dots were still on the same curve. It can be clearly seen also that if pizza consumption is reduced, for example, from A to B, the consumption of Pepsi is increased to maintain customer satisfaction. Slope of any point on the indifference curve shows the willingness of consumers to swap an item with other items. This rate is called as marginal rate of substitution / marginal rate of substitution (MRS). MRS measures how many Pepsi consumers need to compensate for the reduction of one unit of Pizza. Note that the indifference curve is not a straight line. This happens because the MRS is not the same for all points on the curve. The rate at which consumers are willing to exchange an item with other items depends on the amount of goods that have been consumed. The rate at which consumers are willing to exchange Pizza with Pepsi depends on whether he is hungry or thirsty, which in turn depends on the number of Pizza and Pepsi that has been consumed.

These are four properties of indifference curves.

1. Higher indifference curves are preferred over the low one
2. An indifference curve is downward sloping
3. Indifference curves are not crossed each other

Indifference curves crossed each other as shown below may not happen. It is because of this premise will not fit or contradict the main premise in economy: consumers prefer to consume more stuff.

Crossed Indifference Curve - impossible

4. Indifference curves are bowed inward

People are more willing to exchange goods when they have abundant and less willing to exchange goods when they have a few

At point A, the consumer has few Pizzas and many Pepsi, so it takes a lot to make him exchange Pepsi to a pack of Pizza. MRS = 6 Pepsi per one pack of Pizza. At point B, the consumer has a lot of Pizza and a few Pepsi, so he just needs a little extra Pepsi to cut a pack of Pizza. MRS = 1.

Source: Principles of Economics - Mankiw (5th)