Product quality and quantity with responsive pricing

Abstract

In this paper, we study a firm's optimal joint product quality and quantity decisions when the consumers' utilities change with the market environment. We develop a model framework to study a monopolist firm's decisions about product quality and related production quantity planning when responsive pricing is implemented. Consumers are heterogeneous in their marginal valuations of the product quality but homogeneous in their reservation utility. Considering a utility function incorporating the reservation utility, quality, and price, consumers make their purchase decisions. We find that as the reservation utility increases or the quality valuation decreases, the optimal quantity increases. However, counterintuitively, the optimal quality decreases when the reservation utility becomes higher. Furthermore, the product quality and quantity are substitutes in the context of responsive pricing. We also investigate the optimal quality and quantity for a product line that is vertically differentiated. Compared to a firm offering a single product, a firm offering a product line is more likely to alter its quality investment decisions due to changes in reservation utility, whereas the optimal investment decisions are less sensitive to changes in quality valuation.

Keywords:

• Reservation utility
• product quality
• production quantity
• responsive pricing
• market uncertianty

Acknowledgements

The authors are grateful to the editors and four anonymous reviewers for their valuable comments, which have significantly improved the quality of this work.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The work of the first two authors was supported by the National Key R&D Program of China [Grant No. 2018YFB1601401], National Natural Science Foundation of China (NSFC) [Grant Nos. 71921001, 71991464/71991460]. The third author was partially supported by the National Natural Science Foundation of China [Grant Nos. 71801209 and 71731010].

Notes on contributors

Yugang Yu

Yugang Yu, is Executive Dean and Yangtze Scholar Distinguished Professor of Logistics and Operations Management at the University of Science and Technology of China (USTC). He obtained his PhD in Management Science and Engineering from the School of Management, USTC in 2003. His current research interests are in logistics, supply chain management and business analytics. He has published more than 100 papers in academic journals, including Productions and Operations Management, Transportation Science, IISE Transactions, International Journal of Production Research, European Journal of Operational Research, and Navel Research Logistics. His papers were cited more than 2000 times, and Elsevier ranked him as one of ‘the most cited researchers in the Mainland of China’ in 2014–2019. He received a career development VENI project from the Netherlands Organization for Scientific Research (NWO), a distinguished research scholar grant from the National Science Foundation of China (NSFC), Yangtze Scholar Distinguished Professorship from China Ministry of Education, and the first prize of natural science from China Ministry of Education.

Yanjun Wang

Yanjun Wang, is a PhD candidate in the Department of Management Science and Engineering, School of Management, University of Science and Technology of China (USTC). Her research interests include operations management and price optimization.

Yan Liu

Yan Liu, is an associate professor at the International Institute of Finance, School of Management, University of Science and Technology of China. He earned his PhD degree in Operations Management from Nanyang Technological University. He has been active in the areas of pricing optimization, revenue management, and their interfaces with marketing and behavioral operations.