 On pricing and quality decisions with risk aversionXiang Li and Xiangtong Qi Omega, 2021, vol. 98, issue C Abstract: This paper considers pricing and quality decisions for a product in a firm which is concerned about demand risk stemming from uncertainty as to customers’ valuation. A stylized model is built on the basis of the expected utility theory, and the optimal solutions are characterized under very mild conditions in the scenarios of risk neutrality and risk aversion respectively. It is found that when either price or quality is the sole decision variable, the optimal price decreases with a higher level of risk aversion whereas the optimal quality increases with it. In comparison, when both price and quality are decision variables, a more risk-averse firm will set the product’s price and quality at a lower level simultaneously. This is due to the mutual reinforcement effect between these two decision variables as strategic complements. This effect further enhances the impacts of risk aversion, leading to more radical changes in marginal profit and product price-performance as the risk aversion degree varies. Hence, compared to a single variable, risk aversion is a more serious issue in the presence of both the decision variables in question. Keywords: Risk aversion; Pricing; Quality; Expected utility theory (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jomega:v:98:y:2021:i:c:s0305048318314579 Ordering information: This journal article can be ordered from DOI: 10.1016/j.omega.2019.102118 Access Statistics for this article Omega is currently edited by B. Lev More articles in Omega from Elsevier |
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