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The Use Of Indicators For Unobservable Product Qualities: Inferences Based On Consumer Sorting, Matthew G. Nagler, Fredi Kronenberg, Edward J. Kennelly, Bei Jiang, Chunhui Ma

Publications and Research

We propose a method for measuring the conjectural errors that inexpert consumers make relative to experts in using observable product characteristics as surrogate indicators of a valued unobservable characteristic. Observations on the unobservable characteristic, available to the researcher but not consumers, are used to divide the data into high- and low-quality subsamples. Separate hedonic estimation on the subsamples enables measurement of the relative valuations and conjectures of experts and non-experts with respect to indicators under the assumption that consumers sort across quality grades based on their appraisal expertise. The method is demonstrated using a small sample of SKU-level data on …