Using price as an indicator of quality may not seem like an exception to the law of demand from the point of view of a consumer. After all, if you have no other information about a product other than its price perhaps it may make perfect sense to assume that higher price indicates higher quality. We all probably do it from time to time, perhaps without even being aware of it. This is a well-known behavior¹⁰ and producers must consider it determining the price of a new product, especially when the product represents an entirely new type of product that didn't exist before.

Suppose you invent a negative-calorie frozen dessert that tastes as good as expensive premium ice creams like Ben and Jerry's or Haggen Daz and that has no harmful ingredients. The more of this ice cream one eats, the more weight one loses. Suppose you could manufacture this product for about 30¢ per pint, and could profitably sell it for 75¢ per pint.

This is not just a new product, it is a new type of product so consumers may fear that it's unsafe or a scam. It is quite likely that this fear would be enhanced if the product sold for only 75¢ per pint. It would probably sell much better if you charged $3.75 per pint. This higher market price, about the same price as premium ice creams, would signal to consumers that this is a high-quality product. In such a case the higher price may actually help sales. If so, this is an example of consumers using price as an indicator of quality and it would suggest that the demand curve for your negative calorie product may be upward sloping, violating the law of demand.¹¹

Remember, we aren't suggesting that it is irrational to use price as an indicator of quality. In many, perhaps most, instances the better product is the one with the higher price. We are simply asking if this behavior leads to an exception to the law of demand?
¹⁰

You may have seen a recent TV commercial advertising a diet supplement selling for $153 for a one month supply. It is very likely that this high price was arrived in the hope that dieters would use this "price as an indicator of quality."

In Section 5. Market Adjustment we will examine an alternative explanation for this behavior that does not violate the law of demand.