Consumer heterogeneity and the price-quality relationship

This paper contributes to the price–quality relationship literature by examining the role of consumer heterogeneity. While theoretical research predominantly supports a positive price–quality relationship, empirical findings reveal a more complex picture. This complexity highlights a theoretical gap in understanding the mixed empirical evidence on the price–quality relationship. To address this gap, we introduce consumer heterogeneity and distinguish between objective and subjective quality. We propose an optimal control framework that unifies these dimensions, capturing both positive and negative price–quality relationships. Our main contribution is to show that heterogeneity in consumer type alone is sufficient for positive and negative price–quality relationships to coexist within the same market.