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Dynamic pricing, reference price, and price-quality relationship

Author

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  • Anton, Ramona
  • Chenavaz, Régis Y.
  • Paraschiv, Corina

Abstract

The price-quality relationship receives attention from both practitioners and scholars. Yet, the reference price effect, a central aspect in modeling consumer behavior, is absent from the debate. This article addresses the role of the reference price dynamics in understanding the price-quality relationship. We develop an optimal control model of the dynamic behavior of a firm setting price and quality investment over time, accounting for a reference price effect based on prior selling prices. We contribute to the literature on the price-quality relationship by highlighting the conditions under which better quality may drive a lower price when consumers are prone to a reference price. Analytical results show that a counterintuitive negative price-quality relationship may appear even with a linear demand function. Numerical results emphasize the importance of the initial market conditions in the negative price-quality relationship.

Suggested Citation

  • 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).
    • Handle: RePEc:eee:dyncon:v:146:y:2023:i:c:s0165188922002895
    DOI: 10.1016/j.jedc.2022.104586
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