Better Product Quality May Lead to Lower Product Price

Régis Chenavaz

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Abstract: This article analyzes the conditions under which better product quality implies higher or lower product price. In an optimal control framework, I make the following assumptions: The firm sets the dynamic pricing and product innovation policies; product innovation raises quality, which drives production cost, and consumers are sensitive to price and quality. I derive a rule of price-quality relationship that stresses the influence of quality on price through the effects of cost (positive), sales (negative), and markup (positive). This article shows that, while maximizing profit and despite a quality and cost increases, the firm may decrease product prices because of the possibility of generating more sales as a result of combining better quality with lower price. This sales effect solves the puzzle of a negative price-quality relationship. More generally, the sales effect mitigates the ability of price to convey information about quality.

Keywords: Dynamic pricing; Product innovation; Product quality; price-quality relationship; quality-based cost (search for similar items in EconPapers)
Date: 2017-01
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Citations: View citations in EconPapers (12)

Published in The B.E. Journal of Theoretical Economics, 2017, 17 (1), pp.1--22. ⟨10.1515/bejte-2015-0062⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01590011

DOI: 10.1515/bejte-2015-0062

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