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The Law of Supply states that at higher prices, producers are willing to offer more products for sale than at lower prices. The law of demand states that people will buy more of a product at a lower price than at a higher price, if nothing changes. Furthermore, at a lower price, more people can afford to buy more goods and more of an item more frequently, than they can at a higher price. Knowing this, we can confidently say that lower prices increase demand. The question is: Can it ever work the other way? The answer is yes. Despite the standard economic rule of thumb, there are times when higher prices can increase demand, or at least appear to.
The Price-Quality / Price-Value Relationship
To review the idea that increased price can increase demand; we need to look into the consumer perceived relationship between the quality and price of a product. The price/quality relationship refers to the perception by most consumers that a relatively high price is a sign of good quality. “High prices that are associated with high quality are signals that the consumer wants to detect, and high prices associated with mediocre quality can be thought of as noise that the consumer wishes to avoid. When a consumer encounters a high priced product, s/he is aware that not all high priced products offer high quality. If the high price turns out to be a signal (i.e., high price with high quality) then s/he might benefit from buying the higher priced product.”1 Furthermore, the greater the uncertainty surrounding a product, the more consumers depend on the price/quality decision and the more of a premium they are prepared to pay.
Quality conscious consumers will buy more of a product as the quality of the product increases, regardless of the products price, at least up until the equilibrium price. They will pay these higher prices because they believe a higher quality product offers them greater value and utility. Customer value is based on the relative...