Uncertain Product Quality, Optimal Pricing and Product Development

Anthony Creane

Annals of Operations Research, 2002, vol. 114, issue 1, 83-103

Abstract: A firm is developing a new product. However, the firm is uncertain as to how consumers will perceive the product's desirability or quality. Using a general model of product quality, conditions for an increase in uncertainty to increase the optimal price are derived. General conditions are derived under which the firm prefers the less risky project, the one with lower quality variability. However, if at the optimal price the firm only has positive demand for high quality realizations, then the firm prefers a more risky project. As the uncertainty exists in the consumers' preferences, welfare effects can be determined, unlike in previous work examining uncertainty. Copyright Kluwer Academic Publishers 2002

Keywords: vertical differentiation; risk; uncertainty (search for similar items in EconPapers)
Date: 2002
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DOI: 10.1023/A:1021054001562

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