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Better Product Quality May Lead to Lower Product Price

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  • Chenavaz Régis

    (KEDGE Business School, AMSE, CNRS & EHESS, Domaine de Luminy, rue Antoine Bourdelle, 13288 Marseille, France)

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

  • Chenavaz Régis, 2017. "Better Product Quality May Lead to Lower Product Price," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 17(1), pages 1-22, January.
    • Handle: RePEc:bpj:bejtec:v:17:y:2017:i:1:p:22:n:4
    DOI: 10.1515/bejte-2015-0062
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    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. & 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.
    3. Chenavaz, Régis Y. & Eynan, Amit, 2021. "Advertising, goodwill, and the Veblen effect," European Journal of Operational Research, Elsevier, vol. 289(2), pages 676-682.
    4. 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.
    5. 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).
    6. Chenavaz, Régis Y. & Leocata, Marta & Ogonowska, Malgorzata & Torre, Dominique, 2022. "Sustainable tourism," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    7. 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.
    8. Régis Chenavaz & Sajjad M. Jasimuddin, 2017. "An analytical model of the relationship between product quality and advertising," Post-Print hal-01685892, HAL.
    9. Régis Chenavaz, 2017. "Dynamic quality policies with reference quality effects," Applied Economics, Taylor & Francis Journals, vol. 49(32), pages 3156-3162, July.
    10. Voros, Jozsef, 2019. "An analysis of the dynamic price-quality relationship," European Journal of Operational Research, Elsevier, vol. 277(3), pages 1037-1045.
    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. 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.
    13. 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).

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