Price and Quality Decisions in Heterogeneous Markets

This paper analyzes the optimal price and quality decisions of a retailer for its different stores in a heterogeneous market. The consumers are assumed to be heterogeneous in their willingness to pay for quality and are non-uniformly distributed in the market. This type of heterogeneity which is identified based on income disparity can have important implications for a retailer’s optimal policy. The specific objective of this paper is to investigate how the distribution of consumers’ types in the market and their travel costs affect the optimal setting of price and quality levels among different stores of a retailer. Our results express that the geographical disparity of willingness to pay plays a significant role in the differentiation and targeting strategy of a retailer. Comparative analysis shows that the widely adopted assumption of uniform distribution of consumers in the literature leads to non-optimal decisions where the distribution of consumers is non-uniform in a real-world situation.