Higher prices can actually expand market share when they act as a quality signal. Consumers often infer that a more expensive offering is superior, especially in categories where quality is hard to verify before purchase. This inference can outweigh the deterrent effect of a higher price tag, driving additional customers to the product.

A downtown café increased its latte price from $3 to $4; the next week its average daily cups rose from 80 to 90. The 2006 field experiment by Gneezy and List documented the same pattern, showing that a modest price hike boosted perceived value and lifted demand by roughly 12% in a coffee‑shop setting. The underlying incentive is simple: buyers use price as a shortcut for quality, so the firm captures more margin while attracting a larger segment of quality‑seeking patrons.

The paradox unravels once the product’s quality becomes easily observable or when price differentials become too large to ignore. In markets where reviews, trials, or certifications dominate, the price cue loses its signaling power and can suppress sales. Managers should therefore calibrate price increases to stay within the “signal window” where higher cost still feels credible but not prohibitive.