IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v256y2017i3p877-885.html
   My bibliography  Save this article

Interaction of pricing, advertising and experience quality: A dynamic analysis

Author

Listed:
  • Caulkins, Jonathan P.
  • Feichtinger, Gustav
  • Grass, Dieter
  • Hartl, Richard F.
  • Kort, Peter M.
  • Seidl, Andrea

Abstract

For certain goods or services, the quality of the product can be assessed by customers only after consumption. We determine the optimal time paths for pricing, advertising and quality for a profit-maximizing firm facing demand that is influenced both by this experience quality as well as by advertising. In particular, there may exist two optimal trajectories separated by an indifference threshold in which the firm has the same utility of converging to either of the two long-run steady states. Or, to put it in a nutshell: the optimal mix of marketing instruments may lead to history-dependence. One implication is that there may be a market failure such that a government subsidy could help reach the steady state that is best for the Economy in the sense of having greater sales and a higher quality product.

Suggested Citation

  • Caulkins, Jonathan P. & Feichtinger, Gustav & Grass, Dieter & Hartl, Richard F. & Kort, Peter M. & Seidl, Andrea, 2017. "Interaction of pricing, advertising and experience quality: A dynamic analysis," European Journal of Operational Research, Elsevier, vol. 256(3), pages 877-885.
    • Handle: RePEc:eee:ejores:v:256:y:2017:i:3:p:877-885
    DOI: 10.1016/j.ejor.2016.06.056
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S037722171630515X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ejor.2016.06.056?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Vasiliki Kostami & Sampath Rajagopalan, 2014. "Speed–Quality Trade-Offs in a Dynamic Model," Manufacturing & Service Operations Management, INFORMS, vol. 16(1), pages 104-118, February.
    2. Gustav Feichtinger & Alfred Luhmer & Gerhard Sorger, 1988. "Optimal Price and Advertising Policy for a Convenience Goods Retailer," Marketing Science, INFORMS, vol. 7(2), pages 187-201.
    3. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1328-1346, December.
    4. El Ouardighi, Fouad & Pasin, Federico, 2006. "Quality improvement and goodwill accumulation in a dynamic duopoly," European Journal of Operational Research, Elsevier, vol. 175(2), pages 1021-1032, December.
    5. El Ouardighi, Fouad, 2014. "Supply quality management with optimal wholesale price and revenue sharing contracts: A two-stage game approach," International Journal of Production Economics, Elsevier, vol. 156(C), pages 260-268.
    6. Fouad El Ouardighi & Konstantin Kogan, 2013. "Dynamic conformance and design quality in a supply chain: an assessment of contracts’ coordinating power," Annals of Operations Research, Springer, vol. 211(1), pages 137-166, December.
    7. Arieh Gavious & Oded Lowengart, 2012. "Price–quality relationship in the presence of asymmetric dynamic reference quality effects," Marketing Letters, Springer, vol. 23(1), pages 137-161, March.
    8. Jonathan P. Caulkins & Gustav Feichtinger & Josef Haunschmied & Gernot Tragler, 2006. "Quality Cycles and the Strategic Manipulation of Value," Operations Research, INFORMS, vol. 54(4), pages 666-677, August.
    9. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
    10. Yehuda Kotowitz & Frank Mathewson, 1979. "Advertising, Consumer Information, and Product Quality," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 566-588, Autumn.
    11. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    12. Grass, D., 2012. "Numerical computation of the optimal vector field: Exemplified by a fishery model," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1626-1658.
    13. Gustav Feichtinger & Richard F. Hartl & Suresh P. Sethi, 1994. "Dynamic Optimal Control Models in Advertising: Recent Developments," Management Science, INFORMS, vol. 40(2), pages 195-226, February.
    14. Kotowitz, Y & Mathewson, F, 1979. "Informative Advertising and Welfare," American Economic Review, American Economic Association, vol. 69(3), pages 284-294, June.
    15. Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(4), pages 659-679.
    16. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    17. Caulkins, J.P. & Feichtinger, G. & Grass, D. & Hartl, R.F. & Kort, P.M. & Seidl, A., 2011. "Optimal pricing of a conspicuous product during a recession that freezes capital markets," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 163-174, January.
    18. Krishnan S. Anand & M. Faz{i}l Paç & Senthil Veeraraghavan, 2011. "Quality-Speed Conundrum: Trade-offs in Customer-Intensive Services," Management Science, INFORMS, vol. 57(1), pages 40-56, January.
    19. G. E. Fruchter, 2009. "Signaling Quality: Dynamic Price-Advertising Model," Journal of Optimization Theory and Applications, Springer, vol. 143(3), pages 479-496, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yan, Yingchen & Zhao, Qiuhong & Qin, Zhongfeng & Sun, Gaoji, 2022. "Integration of development and advertising strategies for multi-attribute products under competition," European Journal of Operational Research, Elsevier, vol. 300(2), pages 490-503.
    2. De Giovanni, Pietro & Zaccour, Georges, 2023. "A survey of dynamic models of product quality," European Journal of Operational Research, Elsevier, vol. 307(3), pages 991-1007.
    3. Wei Peng & Baogui Xin & Yekyung Kwon, 2019. "Optimal Strategies of Product Price, Quality, and Corporate Environmental Responsibility," IJERPH, MDPI, vol. 16(23), pages 1-24, November.
    4. Cui Zhao & Xiaoshuai Peng & Zhendong Li, 2023. "The influence of online customer reviews on two-stage product strategy in a competitive market," Annals of Operations Research, Springer, vol. 326(1), pages 411-503, July.
    5. Rui Sun & Dayi He & Jingjing Yan & Li Tao, 2021. "Mechanism Analysis of Applying Blockchain Technology to Forestry Carbon Sink Projects Based on the Differential Game Model," Sustainability, MDPI, vol. 13(21), pages 1-18, October.
    6. Luca Grosset & Bruno Viscolani, 2020. "Decisions on production and quality," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 43(1), pages 91-107, June.
    7. Hongjuan Song & Yushi Jiang, 2019. "Dynamic pricing decisions by potential tourists under uncertainty: The effects of tourism advertising," Tourism Economics, , vol. 25(2), pages 213-234, March.
    8. Seidl, Andrea & Caulkins, Jonathan P. & Hartl, Richard F. & Kort, Peter M., 2018. "Serious strategy for the makers of fun: Analyzing the option to switch from pay-to-play to free-to-play in a two-stage optimal control model with quadratic costs," European Journal of Operational Research, Elsevier, vol. 267(2), pages 700-715.
    9. Zhang, Qiao & Zhang, Jianxiong & Zaccour, Georges & Tang, Wansheng, 2018. "Strategic technology licensing in a supply chain," European Journal of Operational Research, Elsevier, vol. 267(1), pages 162-175.
    10. Zhen, Xueping & (George) Cai, Gangshu & Song, Reo & Jang, Sungha, 2019. "The effects of herding and word of mouth in a two-period advertising signaling model," European Journal of Operational Research, Elsevier, vol. 275(1), pages 361-373.
    11. Guo, Feng & Bo, Qingwen & Tong, Xun & Zhang, Xiaofei, 2020. "A paradoxical view of speed and quality on operational outcome: An empirical investigation of innovation in high-tech small and medium-sized enterprises," International Journal of Production Economics, Elsevier, vol. 229(C).
    12. Lu, Lijue & Navas, Jorge, 2021. "Advertising and quality improving strategies in a supply chain when facing potential crises," European Journal of Operational Research, Elsevier, vol. 288(3), pages 839-851.
    13. Cui Zhao & Xiaojun Wang & Yongbo Xiao & Jie Sheng, 2022. "Effects of online reviews and competition on quality and pricing strategies," Production and Operations Management, Production and Operations Management Society, vol. 31(10), pages 3840-3858, October.
    14. Guan, Zhimin & Ye, Tong & Yin, Rui, 2020. "Channel coordination under Nash bargaining fairness concerns in differential games of goodwill accumulation," European Journal of Operational Research, Elsevier, vol. 285(3), pages 916-930.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fouad El Ouardighi & Gustav Feichtinger & Dieter Grass & Richard F. Hartl & Peter M. Kort, 2016. "Advertising and Quality-Dependent Word-of-Mouth in a Contagion Sales Model," Journal of Optimization Theory and Applications, Springer, vol. 170(1), pages 323-342, July.
    2. De Giovanni, Pietro & Zaccour, Georges, 2023. "A survey of dynamic models of product quality," European Journal of Operational Research, Elsevier, vol. 307(3), pages 991-1007.
    3. G. E. Fruchter, 2009. "Signaling Quality: Dynamic Price-Advertising Model," Journal of Optimization Theory and Applications, Springer, vol. 143(3), pages 479-496, December.
    4. G. E. Fruchter, 2008. "Dual-Role Based Pricing in a Dynamic and Competitive Environment," Journal of Optimization Theory and Applications, Springer, vol. 138(1), pages 27-44, July.
    5. Georg Meran & Reimund Schwarze, 2010. "Can minimum prices assure the quality of professional services?," European Journal of Law and Economics, Springer, vol. 30(2), pages 171-199, October.
    6. Dubois, Pierre & Nauges, Céline, 2010. "Identifying the effect of unobserved quality and expert reviews in the pricing of experience goods: Empirical application on Bordeaux wine," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 205-212, May.
    7. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, January.
    8. Salvatore Piccolo & Piero Tedeschi & Giovanni Ursino, 2018. "Deceptive Advertising with Rational Buyers," Management Science, INFORMS, vol. 64(3), pages 1291-1310, March.
    9. Bandyopadhyay, Arindam & Das, Sandwip Kumar, 2005. "The linkage between the firm's financing decisions and real market performance: A panel study of Indian corporate sector," Journal of Economics and Business, Elsevier, vol. 57(4), pages 288-316.
    10. Stone, Michael P. & Miceli, Thomas J., 2012. "Optimal attorney advertising," International Review of Law and Economics, Elsevier, vol. 32(3), pages 329-338.
    11. Rafael López Zorzano & Teodosio Pérez-Amaral & Teresa Garín-Muñoz & Covadonga Gijón Tascón, 2012. "Customer Service Quality and Incomplete Information in Mobile Telecommunications: A Game Theoretical Approach to Consumer Protection," Documentos de Trabajo del ICAE 2012-23, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    12. Bartke, Stephan, 2015. "The economic role of valuers in real property markets," UFZ Discussion Papers 13/2015, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
    13. repec:gbl:wpaper:2013-01 is not listed on IDEAS
    14. Karsten Mause, 2010. "Considering Market-Based Instruments for Consumer Protection in Higher Education," Journal of Consumer Policy, Springer, vol. 33(1), pages 29-53, March.
    15. Lu, Lijue & Navas, Jorge, 2021. "Advertising and quality improving strategies in a supply chain when facing potential crises," European Journal of Operational Research, Elsevier, vol. 288(3), pages 839-851.
    16. Nicolau, Juan Luis & Sellers, Ricardo, 2002. "The stock market's reaction to quality certification: Empirical evidence from Spain," European Journal of Operational Research, Elsevier, vol. 142(3), pages 632-641, November.
    17. Lupton, Sylvie, 2006. "Il était une fois la qualité," MPRA Paper 5, University Library of Munich, Germany.
    18. Huang, Jian & Leng, Mingming & Liang, Liping, 2012. "Recent developments in dynamic advertising research," European Journal of Operational Research, Elsevier, vol. 220(3), pages 591-609.
    19. 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.
    20. Franziska Rischkowsky & Thomas Döring, 2008. "Consumer Policy in a Market Economy Considerations from the Perspective of the Economics of Information, the New Institutional Economics as well as Behavioural Economics," Journal of Consumer Policy, Springer, vol. 31(3), pages 285-313, September.
    21. Belacin, Gisele, 2008. "Disponibilidad a pagar por atributos de calidad. Un estudio aplicado para el caso de la leche fluida," Nülan. Deposited Documents 635, Universidad Nacional de Mar del Plata, Facultad de Ciencias Económicas y Sociales, Centro de Documentación.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:256:y:2017:i:3:p:877-885. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.