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Abstract
Many studies report that correlations between price and quality tend to be low. These studies are often taken as evidence that markets are inefficient. It is argued that price-quality correlations do not necessarily reflect the degree of efficiency of a market. A measure of market efficiency is defined as the aggregate amount that consumers lose due to not choosing the maximum utility brand. Given this measure and a model of consumer search behavior, it is demonstrated analytically that losses in a particular market depend on the distribution of prices and qualities, the number of alternative brands, and the level of search costs, as well as the price-quality correlation. Price-quality correlations are only one of many determinants of how much consumers lose for not buying the best brand. Several numerical examples are constructed that demonstrate that losses need not be closely related to price-quality correlations.