Price and Quality Management with Strategic Consumers: Whether to Introduce a High or Low Product Variant

Abstract We consider a firm that sells a product to strategic consumers sensitive to both price and quality over two periods. The firm can change its product quality and must determine its prices in both periods as well as whether and how to change product quality in the second period. In equilibrium, the firm would choose one strategy from the following four: simultaneous markdown and downgrade, markdown only, simultaneous markup and upgrade, and simultaneous markdown and upgrade. Such a policy structure holds irrespective of whether the firm is patient. However, the policy set shrinks when the marginal cost changes from quadratic to linear in quality and expands when customer types are uncertain in the sense that the firm is not certain about the upper bound of the support of the customer type. In the latter, the equilibrium policy is same when the uncertainty is the highest as when uncertainty is absent.