Modeling the impact of product quality on dynamic pricing and advertising policies

The marketing-mix of price–quality and advertising–quality relationship is well studied. Less understood is the price–advertising–quality relationship. This article fills the gap, investigating the interplay between price, advertising, and quality in an optimal control model. Our results generalize the condition of Dorfman–Steiner in a dynamic context. Also, they point to the impact of greater product quality on the dynamic policies of pricing and advertising. Furthermore, a phase diagram analysis shows that quality develops monotonically in time and converges to a unique steady state. We also show that quality investment could either decrease or increase over time but this depends on its effectiveness. Our results spot the profitable opportunities of a firm managing a more complex marketing-mix.

[1]  G. Zaccour,et al.  Optimal pricing and advertising policies for an entertainment event , 2007 .

[2]  Rainer Schlosser,et al.  Oligopoly Pricing and Advertising in Isoelastic Adoption Models , 2015, Dyn. Games Appl..

[3]  Rainer Schlosser.  Stochastic Dynamic Pricing and Advertising in Isoelastic Oligopoly Models , 2015 .

[4]  C. Fornell,et al.  The Relationship between Advertising and Product Quality over the Product Life Cycle: A Contingency Theory , 1988 .

[5]  O. Lowengart,et al.  Price–quality relationship in the presence of asymmetric dynamic reference quality effects , 2012 .

[6]  Régis Chenavaz,et al.  Dynamic pricing, product and process innovation , 2012, Eur. J. Oper. Res..

[7]  József Vörös.  Multi-period models for analyzing the dynamics of process improvement activities , 2013, Eur. J. Oper. Res..

[8]  Peter M. Kort,et al.  Autonomous and advertising-dependent 'word of mouth' under costly dynamic pricing , 2016, Eur. J. Oper. Res..

[9]  Régis Chenavaz,et al.  An analytical model of the relationship between product quality and advertising , 2017, Eur. J. Oper. Res..

[10]  Gila E. Fruchter,et al.  Signaling Quality: Dynamic Price-Advertising Model , 2009 .

[11]  Pinar Keskinocak,et al.  Dynamic pricing in the presence of inventory considerations: research overview, current practices, and future directions , 2003, IEEE Engineering Management Review.

[12]  Jian Ni,et al.  When better quality or higher goodwill can result in lower product price: A dynamic analysis , 2019, J. Oper. Res. Soc..

[13]  Panagiotis Kouvelis,et al.  A Differential Game Theoretic Model for Duopolistic Competition on Design Quality , 1997, Oper. Res..

[14]  József Vörös.  An analysis of the dynamic price-quality relationship , 2019, Eur. J. Oper. Res..

[15]  Wansheng Tang,et al.  A joint dynamic pricing and advertising model of perishable products , 2015, J. Oper. Res. Soc..

[16]  Martin Weber,et al.  Optimal Advertising and Pricing in a Class of General New-Product Adoption Models , 2013, Eur. J. Oper. Res..

[17]  L. Lambertini,et al.  Dynamic Advertising Under Vertical Product Differentiation , 2003 .

[18]  Albert Y. Ha,et al.  Quality in Supply Chain Encroachment , 2016, Manuf. Serv. Oper. Manag..

[19]  Zhi-Long Chen,et al.  Recent Developments in Dynamic Pricing Research: Multiple Products, Competition, and Limited Demand Information , 2015 .

[20]  R. Dorfman,et al.  Optimal Advertising and Optimal Quality , 1976 .

[21]  Liang Liang,et al.  Price and quality decisions in dual-channel supply chains , 2017, Eur. J. Oper. Res..

[22]  Claudio A. Piga,et al.  Competition in a duopoly with sticky price and advertising , 2000 .

[23]  A. V. den Boer,et al.  Dynamic Pricing and Learning: Historical Origins, Current Research, and New Directions , 2013 .

[24]  Jian Huang,et al.  Recent developments in dynamic advertising research , 2012, Eur. J. Oper. Res..

[25]  Wuyi Yue,et al.  Quality investment and price decision in a risk-averse supply chain , 2011, Eur. J. Oper. Res..

[26]  Xiaojun Pan,et al.  Production , Manufacturing and Logistics Dynamic optimal control of process – product innovation with learning by doing , 2015 .

[27]  G. Zaccour,et al.  Optimal quality improvements and pricing strategies with active and passive product returns , 2019, Omega.

[28]  K. Bagwell.  The Economic Analysis of Advertising , 2005 .

[29]  G. Zaccour,et al.  Pricing and Advertising of Private and National Brands in a Dynamic Marketing Channel , 2008 .

[30]  Régis Chenavaz,et al.  Dynamic quality policies with reference quality effects , 2017 .

[31]  Peter M. Kort,et al.  Advertising and Quality-Dependent Word-of-Mouth in a Contagion Sales Model , 2016, J. Optim. Theory Appl..

[32]  Peter M. Kort,et al.  Optimal pricing of a conspicuous product during a recession that freezes capital markets , 2011 .

[33]  Georges Zaccour,et al.  A survey of game-theoretic models of cooperative advertising , 2014, Eur. J. Oper. Res..

[34]  Pei-Chun Lin,et al.  OPTIMAL PRICING, PRODUCTION RATE, AND QUALITY UNDER LEARNING EFFECTS , 2008 .

[35]  József Vörös,et al.  The dynamics of price, quality and productivity improvement decisions , 2006, Eur. J. Oper. Res..

[36]  E. Dockner,et al.  Differential Games in Economics and Management Science , 2001 .

[37]  R. Hartl,et al.  Dynamic Optimal Control Models in Advertising: Recent Developments , 1994 .

[38]  Régis Y. Chenavaz,et al.  Dynamic pricing for inventories with reference price effects , 2018, Economics.

[39]  S. Kalish.  Monopolist Pricing with Dynamic Demand and Production Cost , 1983 .

[40]  Jianxiong Zhang,et al.  Quality improvement and pricing with reference quality effect , 2017 .

[41]  Gerald L. Thompson,et al.  Optimal strategies for general price-quality decision models of new products with learning production costs , 1996 .

[42]  S. Sethi.  Dynamic Optimal Control Models in Advertising: A Survey , 1977 .

[43]  Régis Y. Chenavaz.  Better Product Quality May Lead to Lower Product Price , 2016 .

[44]  Georges Zaccour,et al.  Differential Games in Marketing , 2003 .

[45]  Qinquan Cui,et al.  Quality investment, and the contract manufacturer's encroachment , 2019, Eur. J. Oper. Res..

[47]  Régis Chenavaz,et al.  Dynamic pricing rule and R&D , 2011 .

[48]  Feryal Erhun,et al.  Quality and entry deterrence , 2015, Eur. J. Oper. Res..

[49]  G. Erickson.  Differential game models of advertising competition , 1995 .