WHY ARE SOME PRODUCTS BRANDED AND OTHERS NOT

Why do some consumers pay a premium for branded products? According to the consumer information theory, brands signal the quality of experience goods (products whose quality cannot be determined on inspection) to consumers for whom, personal search and testing is relatively costly. We find that the product and customer mix in a sample of branded and unbranded service stations is generally consistent with the theory. Branded dealers are more likely to carry products for which cheating on quality is an issue and to serve customers for whom personal search and testing is relatively costly.