Dynamic pricing, reference price, and price-quality relationship

Ramona Anton, Régis Y. Chenavaz and Corina Paraschiv

Journal of Economic Dynamics and Control, 2023, vol. 146, issue C

Abstract: The price-quality relationship receives attention from both practitioners and scholars. Yet, the reference price effect, a central aspect in modeling consumer behavior, is absent from the debate. This article addresses the role of the reference price dynamics in understanding the price-quality relationship. We develop an optimal control model of the dynamic behavior of a firm setting price and quality investment over time, accounting for a reference price effect based on prior selling prices. We contribute to the literature on the price-quality relationship by highlighting the conditions under which better quality may drive a lower price when consumers are prone to a reference price. Analytical results show that a counterintuitive negative price-quality relationship may appear even with a linear demand function. Numerical results emphasize the importance of the initial market conditions in the negative price-quality relationship.

Keywords: OR in marketing; Dynamic pricing; Reference price; Product quality; Price-quality relationship (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:146:y:2023:i:c:s0165188922002895

DOI: 10.1016/j.jedc.2022.104586

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