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The price of quality claims

Authors

  • Charles S. Tapiero

    Corresponding author
    1. Department of Finance and Risk Engineering, New York University Polytechnic Institute, NY, U.S.A.
    • Department of Finance and Risk Engineering, New York University Polytechnic Institute, NY, U.S.A.
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Abstract

Quality claims and quality in fact of financial and industrial products as well as financial and business services are essential to entice and attract customers. For these reasons, firms are often tempted to assert claims that might or might not be met. These claims have risks which cannot always be prevented when interpreted as a ‘sure thing’ while in fact, quality performance is probabilistic. This paper considers a financial (utility based) approach to pricing a quality claim. To do so, we assume that ex-ante, a true quality performance is defined by a density function while claims are advertised—setting expectations for a quality performance. On the basis of these assumptions we determine the price associated with such claims. Copyright © 2010 John Wiley & Sons, Ltd.

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