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Quality and Pricing Decisions

  1. Chester Chambers

Published Online: 15 FEB 2011

DOI: 10.1002/9780470400531.eorms1030

Wiley Encyclopedia of Operations Research and Management Science

Wiley Encyclopedia of Operations Research and Management Science

How to Cite

Chambers, C. 2011. Quality and Pricing Decisions. Wiley Encyclopedia of Operations Research and Management Science. .

Author Information

  1. Johns Hopkins University, Carey Business School, Baltimore, Maryland

Publication History

  1. Published Online: 15 FEB 2011

Abstract

When firms decide to offer a product or service, they make integrated decisions regarding the characteristics of the product to be offered and the price that will be charged. These interrelated decisions are often referred to as product positioning. In this article, the topic within the contexts of several different settings are introduced. Research in this field can be parsed into groups based upon whether the focus is on a single firm acting as a monopolist or on multiple firms non-cooperatively competing among themselves. The relevant works can also be grouped depending on how they handle the subject of production/delivery costs. Some works ignore all cost components. Another set of works includes only fixed costs, while a different set includes variable costs in an economic model. This note provides introductory illustrations regarding each of these settings and outlines major results in each problem category. While this work is not intended to be exhaustive, it does introduce seminal works in the field and explains several major findings. These findings include (i) a monopolist in settings in which costs are negligible or sunk will offer only the highest quality product possible and there is no need to offer a menu of items; (ii) a monopolist facing production costs is motivated to offer a menu of offerings to achieve some measure of price discrimination, and the range of offerings is wider than would be seen under perfect competition; (iii) duopolists sharing a market in the absence of cost will strive for maximum product differentiation; (iv) when only fixed costs are relevant the provider of the higher quality good makes the greater profit; and (v) when only variable costs are considered the provider of the lower quality good often makes the greater profit. This work also discusses several recent extensions of the seminal works, which relax key assumptions of earlier efforts. Finally, we end this article with a discussion of open questions in the field.

Keywords:

  • vertical differentiation;
  • non-cooperative games;
  • quality competition;
  • operations strategy;
  • product positioning