An analysis of the dynamic price-quality relationship

In this paper we develop a dynamic model in which demand depends on both price and quality. The objective function maximizes the profit and the salvage value of the firm. In part, quality can be increased by investing into development processes and the value of the accumulated quality knowledge is incorporated into the model. It is pointed out that this salvage value may have large impact on the solution and fundamentally may influence the dynamics of the quality improvement process. The quality dynamics may have both increasing and decreasing impact on price, and besides known factors the influence of the Hamiltonian is identified. We can observe also, that improving operational efficiency softens price increase while quality increases. (C) 2019 Elsevier B.V. All rights reserved.