Dynamic quality and pricing decisions in customer-intensive service systems with online reviews

Cui Zhao and Yao Zhang

International Journal of Production Research, 2019, vol. 57, issue 18, 5725-5748

Abstract: In this paper, we investigate dynamic quality and pricing decisions for customer-intensive service systems with online reviews. We construct a dynamic programming model to determine the optimal quality and pricing strategies. We find that with online reviews, the supplier is forced to provide a higher quality at a higher price for fewer customers, especially when the customer intensity is high. Interestingly, although online reviews deliver quality information for later consumers, the provided quality may decrease over time. Next, we compare the optimal strategies with those of models of either quality flexibility or pricing flexibility, respectively, to examine the merits of our developed model of both quality and pricing flexibilities. The comparison results demonstrate that our model can achieve higher profits, and the advantages of our model increase with the number of periods. In addition, quality (pricing) flexibility is more valuable when consumers are more sensitive to service price (quality). Furthermore, we compare our formulated model with the model for a regular service system, and we illustrate that the optimal quality and pricing strategies in our system are quite different from those of the regular service system.

Date: 2019
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Citations: View citations in EconPapers (7)

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DOI: 10.1080/00207543.2018.1543972

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