Dynamic quality policies with reference quality effects

ABSTRACT

Dynamic pricing policies with reference-price demand have been intensely analysed. Less studied are dynamic quality policies with reference-quality demand. This article studies the dynamic quality policy of a firm whose consumers use a reference point in their decision-making, in line with the principles of behavioural economics. More specifically, I consider reference quality formation in an optimal control setting. By solving on the basis of Pontryagin’s maximum principle, I obtain analytical solutions to the optimal quality policy. The managerial implications of quality reference for dynamic quality policy are discussed.

KEYWORDS:

• Dynamic quality
• product quality
• reference quality
• behavioural economics
• optimal control

JEL CLASSIFICATION:

• C61
• D21
• M21

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ A similar submodularity assumption is discussed in Chenavaz (2016a).

² The proof of (6) is in Appendix 5.1.

³ The proof of (8) is in Appendix 5.2.

⁴ A similar result of (12) for reference price dependence is discussed in Chenavaz (2016b).