An Examination of the Effect of Continuous Quality Improvements on Optimal Pricing for Durable Goods

Abstract

This paper investigates the nature of optimal prices for a durable good in the presence of continuous quality improvements. The analysis of optimal prices is based on a nonlinear dynamic model of sales response that relates price, quality, average life of a product and the persistence of quality perceptions. Numerical solutions to the model are derived by employing the generalized reduced gradient algorithm. The results show that optimal price depends on the persistence of quality perceptions and the average life of a product (an aspect of quality). The analysis of optimal results affirms results based on other models and provides insights on the influence that quality has on optimal pricing. The implications of the results and suggestions for future research are discussed.

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