When better quality or higher goodwill can result in lower product price: A dynamic analysis

Abstract

This article analyses the price-quality and price-goodwill relationships under the influence of quality on goodwill through the effects of cost, sales, and mark-up. We identify the conditions under which a negative price-quality or price-goodwill relationship will arise, that is, price falls as quality or goodwill increases over time. We show that the price-quality or price-goodwill relationship could be negative even if the demand function is linearly additive, and this relationship will tend to be positive when the customer demand becomes more sensitive to the product quality.

Keywords:

• Price-quality relationship
• price-goodwill relationship
• product innovation
• dynamic pricing
• dynamic advertising

Acknowledgements

The authors would like to thank the Editor and the anonymous referee for their insightful comments.