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

Author

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  • Jing Huo
  • Ting Zhang

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.

Suggested Citation

  • Jing Huo & Ting Zhang, 2014. "A dynamic pricing model with goodwill influenced by price-quality effect," International Journal of Management and Decision Making, Inderscience Enterprises Ltd, vol. 13(2), pages 143-156.
    • Handle: RePEc:ids:ijmdma:v:13:y:2014:i:2:p:143-156
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