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Better Product Quality May Lead to Lower Product Price

Author

Listed:
  • Régis Chenavaz

    (LTCI - Laboratoire Traitement et Communication de l'Information - Télécom ParisTech - IMT - Institut Mines-Télécom [Paris] - CNRS - Centre National de la Recherche Scientifique, GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

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.

Suggested Citation

  • Régis Chenavaz, 2017. "Better Product Quality May Lead to Lower Product Price," Post-Print hal-01590011, HAL.
    • Handle: RePEc:hal:journl:hal-01590011
    DOI: 10.1515/bejte-2015-0062
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Chenavaz, Régis, 2016. "Dynamic pricing with reference price dependence," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 10, pages 1-17.
    2. Chenavaz, Régis Y. & Dimitrov, Stanko & Figge, Frank, 2021. "When does eco-efficiency rebound or backfire? An analytical model," European Journal of Operational Research, Elsevier, vol. 290(2), pages 687-700.
    3. Schlosser, Rainer & Chenavaz, Régis Y. & Dimitrov, Stanko, 2021. "Circular economy: Joint dynamic pricing and recycling investments," International Journal of Production Economics, Elsevier, vol. 236(C).
    4. Chenavaz, Régis Y. & Leocata, Marta & Ogonowska, Malgorzata & Torre, Dominique, 2022. "Sustainable tourism," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    5. Voros, Jozsef, 2019. "An analysis of the dynamic price-quality relationship," European Journal of Operational Research, Elsevier, vol. 277(3), pages 1037-1045.
    6. Chenavaz, Régis Y. & Eynan, Amit, 2021. "Advertising, goodwill, and the Veblen effect," European Journal of Operational Research, Elsevier, vol. 289(2), pages 676-682.
    7. Régis Chenavaz & Corina Paraschiv & Gabriel Turinici, 2021. "Dynamic Pricing of New Products in Competitive Markets: A Mean-Field Game Approach," Dynamic Games and Applications, Springer, vol. 11(3), pages 463-490, September.
    8. Kim, Jeong-Yoo & Berg, Nathan, 2017. "Reexamining the Schmalensee effect," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 11, pages 1-12.
    9. Chenavaz, Régis Y. & Feichtinger, Gustav & Hartl, Richard F. & Kort, Peter M., 2020. "Modeling the impact of product quality on dynamic pricing and advertising policies," European Journal of Operational Research, Elsevier, vol. 284(3), pages 990-1001.
    10. Régis Chenavaz, 2017. "Dynamic quality policies with reference quality effects," Applied Economics, Taylor & Francis Journals, vol. 49(32), pages 3156-3162, July.
    11. Régis Chenavaz & Octavio Escobar & Xavier Rousset, 2019. "An analytical framework for retailer price and advertising decisions for products with temperature-sensitive demand," Applied Economics, Taylor & Francis Journals, vol. 51(52), pages 5683-5693, November.
    12. Anton, Ramona & Chenavaz, Régis Y. & Paraschiv, Corina, 2023. "Dynamic pricing, reference price, and price-quality relationship," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    13. Régis Chenavaz & Sajjad M. Jasimuddin, 2017. "An analytical model of the relationship between product quality and advertising," Post-Print hal-01685892, HAL.

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