Title: A dynamic pricing model with goodwill influenced by price-quality effect

Authors: Jing Huo; Ting Zhang

Addresses: School of Management, University of Science and Technology of China, 96, Jinzhai Road, Hefei, Anhui, China ' School of Management, University of Science and Technology of China, 96, Jinzhai Road, Hefei, Anhui, China; Department of Marketing, City University of Hong Kong, Kowloon, SAR, Hong Kong

Abstract: In this paper, we consider an important phenomenon of price-quality effect in goodwill formulation process, that high price indicates high quality thus has a positive impact on goodwill. Based on the familiar Nerlove-Arrow model, we set up a dynamic model, in which the firm maximises its profit by setting optimal price and quality, with the consideration of price-quality effect, i.e., high price could increase the sales through enhancing the goodwill if quality has reached a threshold level. Our result shows that 1) in the high quality strategy scenario, the quality is set at the quality threshold of the existence of price-quality effect, and the optimal price is increasing in the degree of price-quality effect and the quality threshold; 2) in low quality strategy scenario, the quality is set at zero, and the optimal price is decreasing in the quality threshold.

Keywords: dynamic modelling; pricing models; quality threshold; price-quality effect; Nerlove-arrow mode; goodwill; equilibrium; monopoly.

DOI: 10.1504/IJMDM.2014.060861

International Journal of Management and Decision Making, 2014 Vol.13 No.2, pp.143 - 156

Available online: 01 May 2014 *

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