Decision Sciences Journal
Volume 27, Number 3
Summer 1996
An Examination of the Effect of Continuous Quality Improvements
on Optimal Pricing for Durable Goods
Ram Narasimhan
Department of Management, The Eli Broad Graduate School of
Business, Michigan State University, East Lansing, MI 48824-1122,
e-mail: narasimh@pilot.msu.edu
David Mendez
Department of Health Management and Policy, School of Public
Health, The University of Michigan, Ann Arbor, MI 48109, e-mail:
dmendez@umich.edu
Soumen Ghosh
Georgia Institute of Technology, School of Management, Atlanta, GA
30332-0520, e-mail: soumen.ghosh@mgt.gatech.edu
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.
Subject Areas: Dynamic Optimization, Price, Quality, and
Sales Response.
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