Product quality and quantity with responsive pricing

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.

Automated summary

This paper studies a firm's optimal joint product quality and quantity decisions in the context of responsive pricing when consumers' utilities change with the market environment. The research finds that the optimal quantity increases as the reservation utility increases or the quality valuation decreases, but counterintuitively, the optimal quality decreases when the reservation utility becomes higher. Moreover, the product quality and quantity are substitutes in the context of responsive pricing.