Higher Prices a Signal for Higher Quality?

A Study on Water Pricing

Tarun Singh

Abstract

“You get what you pay for,” is a saying that is perhaps all too familiar, but is it true? If

markets functioned perfectly, one would expect that the relationship of higher prices

representing higher quality would hold; but how much do higher prices actually reflect higher

quality? Alternatively, do companies use higher prices as a signal for higher quality that actually

is not present in the product? Studies using prices and consumer report ratings have shown

that the relationship between prices and actual quality is eroded or even eliminated in market

situations (Gerstner, 1985). This paper takes a similar approach, in evaluating why consumers

seemingly prefer to buy expensive brands of water, despite little to no difference in quality. The

paper examines survey data in order to evaluate the relationship between prices and perceived

quality, and looks at what factors cause a consumer to purchase a particular brand of water. In

this paper, I argue that it is possible that consumers are using market prices as a signal for

quality and are overlooking the marginal differences in the actual quality of the water, thus

overlooking which water maximizes utility for a given price.

1. Introduction

The motivation for this paper is twofold. Firstly, the paper assess whether the

relationship between higher prices and high quality holds. Secondly, this paper looks to

determine what factors are most important for consumers in the decision making process,

whether they are making these decisions rationally. Using survey data for water taste tests will

not only address the two factors mentioned above but will also provide a good check of the

robustness of the relationship between price and quality considering water is a product that

consumers purchase on a regular basis. Furthermore, since consumers purchase bottled water

on a regular basis, and there are multiple brands of water available, if consumers choose to buy

bottled water based on quality the price-quality relationship ought to hold. If the relationship

fails or turns out to be weak for a good that consumers have strong information on, then the

price-quality relationship ought to be weaker for larger purchases such as furniture or

electronics, which consumers purchase more infrequently and therefore have less opportunity

to experiment with. Thus, although this paper and the survey data only test consumer

preferences for water, the outcome of this paper can potentially be revealing about other

consumer goods.

Studies done on consumer behavior in the past have shown that consumers, especially

skeptical consumers, tend to use all available information in their decision making process. This

helps consumers who are uninformed about a product’s quality extract as much information as

possible in order to better evaluate the “true value” of the product (Milgrom and Roberts

1986). This means that the consumer takes any pieces of relevant information, including prices,

into consideration. If there are two types of products, low quality and high quality products,

firms generally want to signal to consumers that their product is of high quality in order to

increase their profits. This is especially true for low quality firms, as they would be selling a low

quality product at a high price (Stiving 2000). However, we would expect this intentional

mispricing to be more prevalent for products that consumers purchase infrequently, as there

would be lower risk for a company of being discovered for artificially increasing prices. Since

water is purchased frequently, a company would have to take on a large risk of being

discovered as having artificially higher prices. However, since there is little differentiation

between water taste across bottled water brands, which we will discuss later, it may be more

difficult for consumers to identify a company that is cheating the signaling process.

Turning our attention to bottled water pricing, bottled water is a good that most people

have bought at one point or another, and a good that many people purchase on a regular basis.

It is not hard to observe that prices for bottled water vary drastically from as little as fifty cents

for a 500 ml bottle to over two dollars for a 500 ml bottle depending on the brand. Yet, are

these drastically different prices justifiable given the relative quality of each brand? A few

possible explanations actually justify the difference in prices. The first explanation is that

consumers are aware of differences in taste between types of water and feel that the more

expensive brands are of higher quality due to the extra utility they provide from better taste. A

second alternative is that consumers feel that the higher quality brands provide additional

health benefits, and thus the increased demand for these high quality brands drives up prices.

Thirdly, perhaps the quality that consumers derive is not based from the water itself but rather

from the brand name or from some special utility which is derived from drinking bottled water

through special fancy bottles. Finally, it is possible that consumers are simply using the higher

prices as a proxy for quality and are basing their consumption patterns on these signals.

Multiple studies and surveys have indicated that it is nearly impossible to tell the

difference between what is assumed to be high quality spring water versus filtered water,

especially with respect to taste. A survey conducted in the spring of 2008 by Harvard

University’s Resource Efficiency Program concluded that those surveyed (mostly Harvard

Undergraduates) could not taste the difference between tap water, Aquafina and Evian (Geller

and Steinman 2008). Of those sampled in the survey, only 33.86% of respondents were able to

correctly identify the tap water. In a 2005 taste test of five brands of water and tap water done

by ABC’s 20/20, the cheapest brand of water, Kmart’s American Fare, actually scored the

highest while last place went to the popular French brand, Evian. Tap water ended-up in a tie

for third place. Although the results from the 20/20 survey are not intended to be scientific,

they do show that the price differences between different brands of water, which sometimes

cost up to 500 times the price of tap water, cannot be justified on taste alone.

An obvious reason for choosing bottled water over tap water is the perceived health

benefits. There have been contradictory findings regarding the health threats from drinking tap

water; one recent report by the Associated Press showed that traces of birth control pills, heart

medication, and anti-depressants have been found in tap water across the country. Although

the presence of these medications poses no threat from consuming a single glass of water, it is

plausible that the presence of these drugs can have serious long-term ramifications (Donn, et

al. 2008). At the same time, some investigations have shown that there is little to no difference

in bacteria levels from national brand name water and tap water (Stossel 2005). Although this

seems to provide enough doubt regarding the safety of tap water to justify consumers shifting

consumption from tap water to bottled water, it is important to note that many popular brands

of bottled water such as Dasani and Aquafina contain reprocessed municipal water. In fact, the

use of public sources of water by bottled water companies has made national news, and

Aquafina even includes a statement on each bottle stating the source of the water1. Given this

information, it would be logical to think that consumers who are health conscious are shifting

their consumption away from tap water and brands that reprocess municipal water and

towards more expensive spring waters. However, this explanation fails to account for the fact

that the report by ABC found no differences in bacteria levels between tap water and various

different types of bottled water, including bottled spring water. Furthermore, if consumers

were making consumption choices for bottled water using health benefits as their primary

criterion, the drastic differences in prices between various imported spring waters such as the

price difference between Voss water and Fiji water could not be justified using the explanation

of health benefits since there is conflicting evidence at best, to suggest any health benefits.

Thus, despite potential health benefits from drinking bottled water, it seems that there is

insufficient evidence to suggest the relationship between price and quality is motivated by

health concerns.

The last possible explanation of why consumers purchase water that is more expensive

is also perhaps the hardest hypothesis to eliminate. There is a possibility that consumers prefer

to drink water that is more expensive because the brand of the water provides some social

utility and the higher prices correspond to that additional utility. Anecdotal evidence regarding

the unique designs of water bottles such as those of Voss suggest it is possible that buyers

derive some extra utility from the act of drinking out of special bottles. If this were the case, the

higher prices would represent consumer utility derived from better or fancier packaging and

1 This information can also be found on Aquafina’s website at www.aquafina.com/Aquafinapurificationdiagram.pdf

not actually from the water itself. This paper will try to account for these two possibilities of

deriving utility from factors other than the actual water through the study design.

Finally, there is a chance that the higher prices are actually from companies trying to

signal that their product is of higher quality despite there being little to no difference between

the products. If this is the case, it represents a problem for consumers as they are essentially

being made to pay more for an equivalent product, thus creating a loss in consumer surplus and

an increase in producer surplus. This would be in contrast with the previous three hypotheses

in which the different brands are priced at levels that correspond to utility, and therefore the

higher prices would not cause consumer and producer surpluses to be different from their

expected values.

Survey Design

Overview: For this paper I conducted a taste test of three different bottled water types:

Voss water, Fiji water, and Poland Spring water. All three brands of water are sourced from

naturally existing springs, Voss being from Norway, Fiji from Fiji, and Poland Spring from Maine.

The taste tests were conducted in Winthrop House Dining Hall at Harvard University, and were

administered to undergraduates and both resident and non-resident tutors. The three different

brands of water are all available to Harvard Undergraduates in stores in Harvard Square.

However, unlike Fiji and Poland Spring waters, Voss water can only be found at one of the local

markets.

Water Selection: The three different brands of water were chosen because each brand

has a different level of consumption. Two Norwegian nationals founded Voss water in 1998 and

initial distribution in the US did not begin until 2001 (Voss of Norway 2007), Fiji water was

founded in 1996 (Hollywood... 2004) and Poland Spring began selling bottled water in Maine in

1845 (Poland Spring... 2009). The varying exposure to the market for these brands allows us to

see if the price-quality relationship becomes stronger over time as suggested by previous

studies. Furthermore, the three different brands also differ in their packaging and prestige

associated with their brand names. Voss and Fiji both use fancier packaging and a greater

quantity of packaging than Poland Spring, and both Voss and Fiji, especially Voss, are

considered exclusive brands. Poland Spring on the other hand is the best selling water in the

United States, and its newly redesigned packaging focuses on using less plastic. The survey does

not attempt to include a type of tap water because the purpose of this paper is to check if the

price-quality relationship for bottled water holds and tap water and bottled water serve

different purposes. It would be inaccurate to include tap water as many consumers who

purchase bottled water do so because a bottle allows for portability. Thus, by implementing this

study design I look to address the possible sources for why the differences in prices across

bottled water brands may exist in order to see if the disparate prices can be justified or if

consumers are acting irrationally by accepting corporate signaling.

Participant Selection: The participants for the survey voluntarily agreed to take part in

the survey when approached by me. I simply asked anyone entering or leaving Winthrop House

Dinning Hall if they would like to participate in a taste test regarding bottled water. There were

no incentives of any sort offered to the participants and no participants received anything other

than the water they had samples of. Some participants also urged their friends to participate in

the survey, while many declined any opportunity for participation. Considering that Harvard

assigns undergraduates to upperclass houses randomly, this means of selecting volunteers for

the survey should be sufficiently random.

Water Sampling: The participants were asked to pour the three different brands of

water from their respective bottles into three different sampling cups, similar to the ones that

are found at dentists’ offices. The survey participants were asked to pour the water from the

different water bottles themselves for two different reasons. First, based on comments from

the participants of the study, there was some concern that the water in the bottles was actually

the same. Having the participants pour the water in themselves should give them more

reassurance that the waters were actually correctly labeled, compared with a situation in which

the water was already poured in cups. Secondly, pouring the water from the corresponding

bottles themselves was intended to make factors such as name brand and packaging more

salient when evaluating overall satisfaction from drinking the water. The survey was

administered in two forms- in the first form participants were not made aware of the prices for

each brand of water, whereas in the second version of the survey participants were shown the

price for a 20 oz bottle of each brand2. If consumers do in fact make consumption decisions

based on price signaling then we should see that the more expensive brands score differently in

the survey questions.

Survey Questions: After sampling the three different types of water, participants were

asked to fill out a short series of questions regarding themselves and the water samples on a

Google Spreadsheet Survey. Respondents were asked to fill out fields with their name, sex, age,

2 Since none of the three brands are actually sold in 20 oz. quantities the prices were derived by converting the

prices of each brand into a per oz. price and then multiplying that price by twenty.

height, weight, race and choose from six categories of household income. Participants were

then asked how satisfied they were with each brand of water on a scale of 1-10, what their

main criterion for determining satisfaction was, and how much they would pay for a 20 oz.

bottle of water of each particular brand3. The survey questions were presented in the order above,

but participants had the ability to change any of their responses at any point in the survey. All of the

questions were mandatory to answer, aside from the ‘name’ field that participants could leave

blank if they did not want to be identified.

Results

The initial survey, in which no price information was presented, consisted of 22

participants who were evenly split between male and female. On a scale of 1-10, the average

satisfaction for the three brands of water was 6.77 for Voss, 7 for Fiji and 7.55 for Poland Spring

(Table 1)4. When asked what their primary criterion for determining satisfaction, 18 out of 22 or

81.8 percent of participants listed taste as the primary criterion, while the remaining 4 were

split equally between name brand, health benefits, packaging and other. Respondents, on

average, said they would pay $1.09 for a 20 oz. bottle of Voss water, $1.08 for Fiji water, and

$0.98 for Poland Spring (Table 2)5. The actual price for 20 oz. of water was $2.96 for Voss, $1.36

for Fiji, and $0.67 for Poland Spring6. When regressing how much a person would pay versus

3 Participants were told that a typical soda bottle from a vending machine is 20 oz. in order to provide some

perspective on how large 20 oz. is.

4 The average scores were statistically insignificant from each other at the 10% level. See appendix for details

5 Average prices are rounded to the nearest cent, and were statistically insignificant from each other at the 10%

level. See appendix for details

6 Actual prices are rounded to the nearest cent and are imputed by using per oz. price since none of the brands is

sold in 20 oz. containers.

satisfaction we see that the relationship is significant at the 10% level for Voss and at the 1%

level for Fiji, while statistically insignificant for Poland Spring (Table 3-5). This means that those

who are more satisfied are willing to pay a higher price. However, when controlling for factors

such as weight, height, age, sex, and whether or not taste was their primary factor for

determining utility, the relationship between satisfaction and willingness to pay is eroded. In

fact, after adding these controls, the relationship for Voss is no longer statistically significant,

and the relationship for Fiji is now significant at the 5% level (Tables 6-8).

The second survey, in which participants were shown the actual prices for 20 oz. of each

brand of water, garnered a total of 19 respondents, nine of whom were male and ten who were

female. As seen in Table 9, when participants knew the actual 20 oz. price of each brand their

preferences changed slightly in that Voss was still rated lowest with an average score of 6.10

but Fiji received a score of 6.63 versus 6.26 for Poland Spring7. Of the 19 people surveyed, 12 or

63.16 percent mentioned taste as being the primary factor in determining satisfaction, while

two people cited name brand, while the rest were split evenly between thirst quenching, health

benefits, packaging, price and taste to price ratio. Unlike the first survey, the prices that

respondents were willing to pay were not exactly opposite of the satisfaction scores. On

average, those surveyed stated they would pay $1.14 for 20 oz. of Voss, $1.22 for Fiji and $0.92

for Poland Spring (Table 10)8. When regressing willingness to pay versus satisfaction for each

brand of water, the relationship was statistically insignificant at even the 15% level (Tables 11-

13). Even after adding the same controls that were used in Tables 6-8 for the first survey, the 7 The average scores were statistically insignificant from each other at the 10% level. See appendix for details

8 Average prices are rounded to the nearest cent, and price differences were only statistically significant at the 10%

level between Fiji and Poland Spring. See appendix for details

relationship between the price participants were willing to pay and their satisfaction was still

statistically insignificant at the 15% level (Tables 14-16).

Analysis of Results

The results from the initial survey present an interesting finding: the water that was

most preferred overall, with respect to satisfaction, was actually priced lowest overall. Although

the prices consumers are willing to pay are not statistically different from one another, this

finding is opposite of what we would have expected if the price-quality relationship were to

hold. Upon further examination, we see that only one of 22 participants was willing to pay

more for a brand of water that they had rated lower, and this one response is not enough to

account for the asymmetry between satisfaction and prices. Furthermore, we cannot attribute

this asymmetry to the four respondents who cited reasons other than taste as being the most

important factor in determining satisfaction, since none of the four assigned higher prices to

water they were less satisfied with. Despite not being able to identify one particular source of

this asymmetry, it is still present for the aggregate market, and it is reasonable to assume that

bottled water manufacturers are more concerned with how much a person would pay for their

product rather than why they would pay that amount. This is compounded by the fact that

there was no statistical difference in satisfaction across the three brands of water. Assuming

that companies are not deliberately pricing their products at suboptimal levels, this must mean

that consumers either attain extra utility through mechanisms which were not captured in our

survey, therefore justifying the actual price disparity, or that prices are being used as signals by

the manufacturers.

The second survey presented evidence to suggest that the presence of high prices does

indeed affect the responses of consumers. The differences in the regression results between

the initial survey and the second survey show that satisfaction was no longer a significant

predictor or the price that consumers are willing to pay for the water. Assuming that

satisfaction is indeed a good proxy for total utility, the fact that this relationship is eroded so

significantly (Tables 11-16) suggests that willingness to pay is being determined by a factor

outside of utility. This is especially significant considering the only change in the survey design

from the initial survey to the second survey was that respondents were made aware of the

actual price for 20 oz. of each brand of water. Furthermore, the fact that Poland Spring was

rated second overall but priced lowest can be due to one of two factors. It may be due to the

odd pricing behavior that was seen in the first survey where the water with lowest satisfaction

was priced the highest and vice versa. Alternatively, those taking the survey noticed that the

actual price for Poland Spring was significantly lower than the other two brands and used that

information to price Poland Spring lower despite its higher satisfaction score. If prices are

causing consumers to price goods using information outside of utility then it lends evidence to

the feasibility of companies being able to intentionally overprice water in order to influence

consumers’ willingness to pay.

Potential Problems

Although this study provided some interesting insights into the relationship between

price and quality and why consumers choose to purchase more expensive water, it is not

without potential problems and hurdles. Further data collection would aid the study greatly as

it would provide a more representative sample of the average consumer rather than the

average Harvard consumer. Increased sample size would also help with respect to the

robustness of the statistical tests used to measure differences between satisfaction ratings and

prices. The survey can also be expanded to include more brands of water to see if the findings

of this paper are applicable across other premium water brands and not just specific to the

brands used in our survey. This would help further eliminate potential omitted variable bias

that is present due to either variables for which I did not collect data, or variables that are

otherwise unobservable.

The survey itself can be amended to help eliminate further bias. For example, changing

the order in which the survey questions are presented may provide different priming effects

and therefore may alter the responses of those surveyed. One question for which this may have

a significant effect is when participants were asked what the most important factor was for

them determining satisfaction. If this question was asked before the water tasting and water

rating takes place, it would make the factor more salient in the respondent’s mind and

therefore may have a significant impact on the results. In addition, presenting consumers with

fake prices (i.e. telling them that the cheaper brand is actually more expensive) may be useful,

although brand recognition may make this hard to implement as participants would be aware

of the actual market prices for these brands. At the same time, there were also issues with

certain reporting errors with the question regarding household income. Some respondents,

being college students, interpreted household income to be their personal income and

therefore greatly under-reported their household income. Since this seemed to be a common

confusion I was unable to use data on household income in the data analysis. Having this

additional data may help show if there is segmentation in the bottled water market and if the

consumer preferences are correlated with income. This problem should be easy to remedy by

changing word choice, and perhaps providing clarification as was done with the explanation of

the size of a 20 oz. bottle.

Perhaps the most perplexing part of this study is where satisfaction is actually derived

from. Although the study attempted to address this issue by asking what the most important

criterion for determining satisfaction was, it is possible that satisfaction is determined through

a more nuanced and intricate process. For instance, the primary factor for evaluating utility

may have more weight than any other individual factor but may be overshadowed by the

combined effects of the other factors. Although the data from the first survey showed

consumers were oddly willing to pay more for less satisfying water, more data collection along

with better understanding of where utility and satisfaction are derived from may help better

determine if the price differences between brands can actually be justified.

Finally, it is not clear whether the findings of this paper would be applicable across

different product categories. Therefore, it may be useful to test the applicability of the findings

on other consumer goods, especially those for which consumers have less information and

experience in purchasing. It may even be best to evaluate this possibility by creating surveys for

different product classes: frequently, semi-frequently, and infrequently purchased products, to

see if the price-quality relationships differ based on the knowledge and experience of

consumers. This would also help determine if companies have a greater incentive to provide

signals through false prices for goods that are more infrequently purchased.

Expanding the survey to multiple products and product classes would require a greater

depth, one beyond the scope of this paper. Fortunately, provided additional time and a few

more resources the other problems can be addressed relatively easily by slightly tweaking

either the survey design or survey questionnaire.

Conclusion

As consumers, we are presented with multiple brands that not only provide us with

choices, but also in some cases make it harder to identify which brand is utility maximizing at a

given price. This is certainly the case with the bottled water market. Not only is it unclear as to

how beneficial purchasing bottled water is, the data from this paper shows that when

presented with multiple brands of water, all sold at different prices, consumers seem to ignore

utility and satisfaction and instead let prices determine their willingness to pay, possibly

providing enough incentive for companies to inflate prices accordingly. In order to ensure that

these findings are applicable to overall market conditions, more data is needed before safely

concluding that consumers are acting irrationally, and that bottled water companies are

intentionally increasing prices. However, the findings of this paper certainly justify further

investigation and suggest that markets may actually be operating inefficiently, at least from a

consumer’s perspective.

Appendix

Link to Questionnaire used in both surveys:

http://spreadsheets.google.com/viewform?key=pHh87W_BUxcmx-O8rYSMMSQ

Survey 1:

T-tests for satisfaction:

T-tests for willingness to pay:

Table 1 – Average Satisfaction:

Table 2 – Average willingness to pay:

Table 3 – Voss willingness to pay versus satisfaction:

Table 4 – Fiji willingness to pay versus satisfaction:

Table 5 – Poland Spring willingness to pay versus satisfaction:

Table 6 – Voss willingness to pay versus satisfaction plus controls:

Table 7 – Fiji willingness to pay versus satisfaction plus controls:

Table 8 – Poland Spring willingness to pay versus satisfaction plus controls:

Survey 2:

T-tests for satisfaction:

T-tests for willingness to pay:

Table 9 – Average satisfaction:

Table 10 – Average willingness to pay:

Table 11 – Voss willingness to pay versus satisfaction:

Table 12 – Fiji willingness to pay versus satisfaction:

Table 13 – Poland Spring willingness to pay versus satisfaction:

Table 14 – Voss willingness to pay versus satisfaction plus controls:

Table 15 – Fiji willingness to pay versus satisfaction plus controls:

Table 16 – Poland Spring willingness to pay versus satisfaction plus controls:

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