Customers are often willing to pay higher prices for high-quality products; however, without specialized knowledge, it can be difficult to evaluate whether certain items are high quality. When customers are unsure whether an item is high quality, and worth the price, they are less likely to purchase it. This problem can be resolved through signaling. The seller of a product finds a way to signal, or demonstrate, to the buyer that the product is high quality. One common signaling strategy is to have a person or company that is not involved in the sale provide an objective, unbiased judgment about the quality of a product.
<-NARRATOR:-> Now listen to part of a lecture in a business class.
<-MALE PROFESSOR:-> So OK, here's a good example.
A friend of mine owns a small jewelry store where she sells jewelry.
And the jewelry she sells-watches, rings, necklaces-
is very expensive,
thousands of dollars,
because it's all real gold, real diamonds, and other precious gemstones.
So of course, when customers come into her store...
well, if they're considering spending that much money on a piece of jewelry,
they want to make sure it's authentic,
that the gold is real,
that the gemstones are real and not just pieces of glass.
But most customers don't actually know how to tell the difference, on their own.
So in order to reassure her customers, what my friend did, is
she had a jewelry expert come in and look at all the jewelry in her store.
This expert had like twenty years of experience examining jewelry, so he knew a lot about it...
and the expert examined all the precious gemstones
and certified that they were authentic...
real. And then my friend put up a sign in the store saying that all the jewelry in the store
had been certified as authentic by a leading expert...
so her customers would see this sign
and know that all the jewelry in the store was real.
And since the expert didn't work for my friend's store,
it didn't matter to him if the jewelry got sold or not...
so customers were likely to trust his opinion.
The expert was therefore able to provide evidence
that the jewelry was worth the high prices.
Explain how the example used in the lecture illustrates the concept of signaling.