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.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1 A similar submodularity assumption is discussed in Chenavaz (Citation2016a).
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 (Citation2016b).