higher quality, even though the buyer is not an expert on gemstones. Think of the expensive restaurant where

the food must be good because it is so expensive or the shop where the clothes must be stylish because they

cost so much, or the gallery where the art must be great, because the price tags are high. If you are hiring a

lawyer, you might assume that a lawyer who charges $400 per hour must be better than a lawyer who charges

$150 per hour. In these cases, price can act as a signal of quality.

When buyers use the market price to draw inferences about the products' quality, then markets may have

trouble reaching an equilibrium price and quantity. Imagine a situation where a used car dealer has a lot full of

used cars that do not seem to be selling, and so the dealer decides to cut the car prices to sell a greater

quantity. In a market with imperfect information, many buyers may assume that the lower price implies low-
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