Dynamic interaction among price, quality, durability and the sales rate in a steady state environment: A theoretical analysis

This paper investigates the relationship among price, quality, product durability, quality durability and the sales rate for durable goods. The research builds on a dynamic model of sales reponse, developed by Narasimhan et al. [R. Narasimhan, S. Ghosh, D. Mendez, A dynamic model of product quality and pricing decisions on sales response, Decision Sciences 24 (5) (1993) 893–908]. First, the paper determines whether a stable relationship among price, quality, product durability, quality durability and the sales rate exists, by examining the equilibrium properties of the model. Second, the paper uses the derived equilibrium expressions to develop insights into the relationship among these variables. Third, the paper examines the necessary conditions for the price equilibrium level to be optimal, from the point of view of a profit-maximizing producer. Finally, the paper employs a graphical analysis technique to investigate the impact of increases in quality and quality durability on the optimum price level. Among many results, the paper shows the existence of a minimum quality level and a maximum price level for the sales rate to remain positive. The research also shows that an increase in quality durability (stemming, for instance, from increased advertising) commands an increase in price regardless of the product’s price elasticity of demand. Additionally, the paper establishes an explicit relationship between quality improvements and optimal prices. The practical relevance of the findings is discussed.