Does PRICE and QUALITY have any relation?

If you had to buy a shirt, say branded. After analyzing various factors you reduce your options to two of them but ironically you haven’t used any of them before, so you know nothing more than the price say one of them costs Rs.1000 and other Rs.1100 which one would you buy?
Many of you will choose the one that costs Rs.1100.
Everything remaining same but this time the buying decision is about a blazer. One has a price tag of Rs. 5000 and other Rs. 5500 which one would you choose?
Many of you will choose the pair that costs Rs.5500.
This remains true for every single product we buy from a pair of socks (bought almost every month) to wedding suite (hopefully bought once in a lifetime).
Many buyers cannot justify their decision? But according to studies done there exists a relation between price and quality. Customers find high priced product more qualitative than the one priced lower.
So simply stated the relationship between price and quality can be graphically presented as


So as the price increases customer perceives the product to be of better quality.

Many buyers have different reasons to justify this
Price = Cost + Profit
So the producers charge them more because its costlier to produce quality products.. (They talk about the cost factor)
Well others say that it is the premium producer charge for the quality given (They talk about the premium i.e. profit factor)
But think about products like garments, where the raw material is usually supplied by same vendors but the customer perceives a difference in quality based on price and usually tends to buy the costlier one. None of the above reasons justify this buying behaviour because there is no quality difference at all. So, this is only a perceived notion. This will give a great amount of joy to all the producers because now they can raise their price as high as they want and earn high profit because their high price will only send cues to customers that their product quality is better. A concept referred to as “grandmother’s psychology”
Until now we discussed the topic under the assumption that customer has unlimited money to spend on a particular product and that the product quality can be increased to level of infinity but both of these are practically impossible.
At what price will you buy a 50gm toothpaste, if the quality keeps increasing with the price?
Some would spend Rs.50; others would spend Rs.100 some might go up to Rs.200 but will anyone spend more than RS.500. so customer may demand more and more quality but restrict their spending amount.So there is budget constrain and the basic graph can be redrawn as


This simply indicates that though the customer is expecting higher quality but is not willing to spend any extra money after a certain level.

Now again what level of quality would a customer perceive in the toothpaste with the increasing price?
Some will feel toothpaste that cost Rs.50 as moderate, the one that cost Rs.100 as good, the one that cost Rs.200 as best but after that all toothpaste’s quality would be perceived as same at whatever price they are sold at. So after certain level customer seems to perceive same quality in all toothpastes despite the higher price. Customer expectation of quality from a particular product stops after a particular level.So the basic graph can be redrawn as



Analyzing things so far it’s obviously evident that there exists a certain relation between price and quality. A simple combination of the above two constrains will result in a graph of the following kind



So ideally customer quality cues of a product from price remains true till certain level after which there is not much of an impact on quality and price relationship. Though it’s easy to represent a relationship theoretically and graphically but it’s not practically possible to use this relation easily. The qualitative price would change with every product because customer’s budget constraints are different for different product based on its utility and requirement for e.g. you might afford to pay Rs.50 for toothpaste, Rs.500 for a tie and Rs. 5000 for a watch. This holds true for your quality expectation and perception too. But one thing is sure that producers should price their product such that they don’t lose on the extra profit they could earn by creating a high quality perception in the minds of customers by pricing their product at a correct qualitative price. Again the customers should not judge quality based on price alone.