A dynamic pricing model with goodwill influenced by price-quality effect

Jing Huo and Ting Zhang

International Journal of Management and Decision Making, 2014, vol. 13, issue 2, 143-156

Abstract: In this paper, we consider an important phenomenon of price-quality effect in goodwill formulation process, that high price indicates high quality thus has a positive impact on goodwill. Based on the familiar Nerlove-Arrow model, we set up a dynamic model, in which the firm maximises its profit by setting optimal price and quality, with the consideration of price-quality effect, i.e., high price could increase the sales through enhancing the goodwill if quality has reached a threshold level. Our result shows that 1) in the high quality strategy scenario, the quality is set at the quality threshold of the existence of price-quality effect, and the optimal price is increasing in the degree of price-quality effect and the quality threshold; 2) in low quality strategy scenario, the quality is set at zero, and the optimal price is decreasing in the quality threshold.

Keywords: dynamic modelling; pricing models; quality threshold; price-quality effect; Nerlove-arrow mode; goodwill; equilibrium; monopoly. (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijmdma:v:13:y:2014:i:2:p:143-156

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