Jump to ContentJump to Main Navigation
Show Summary Details
More options …

The B.E. Journal of Theoretical Economics

Editor-in-Chief: Schipper, Burkhard

Ed. by Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier / Wenzelburger, Jan

2 Issues per year

IMPACT FACTOR 2017: 0.220
5-year IMPACT FACTOR: 0.328

CiteScore 2017: 0.28

SCImago Journal Rank (SJR) 2017: 0.181
Source Normalized Impact per Paper (SNIP) 2017: 0.459

Mathematical Citation Quotient (MCQ) 2017: 0.09

See all formats and pricing
More options …

Better Product Quality May Lead to Lower Product Price

Régis ChenavazORCID iD: http://orcid.org/0000-0002-5911-2045
Published Online: 2016-07-13 | DOI: https://doi.org/10.1515/bejte-2015-0062


This article analyzes the conditions under which better product quality implies higher or lower product price. In an optimal control framework, I make the following assumptions: The firm sets the dynamic pricing and product innovation policies; product innovation raises quality, which drives production cost, and consumers are sensitive to price and quality. I derive a rule of price-quality relationship that stresses the influence of quality on price through the effects of cost (positive), sales (negative), and markup (positive). This article shows that, while maximizing profit and despite a quality and cost increases, the firm may decrease product prices because of the possibility of generating more sales as a result of combining better quality with lower price. This sales effect solves the puzzle of a negative price-quality relationship. More generally, the sales effect mitigates the ability of price to convey information about quality.

Keywords: price-quality relationship; dynamic pricing; product quality; product innovation; quality-based cost; optimal control


  • Acharyya, R. 1998. “Monopoly and Product Quality: Separating or Pooling Menu?” Economics Letters 61 (2):187–94.CrossrefGoogle Scholar

  • Adner, R., and D. Levinthal. 2001. “Demand Heterogeneity and Technology Evolution: Implications for Product and Process Innovation.” Management Science 47 (5):611–28.CrossrefGoogle Scholar

  • Bagwell, K., and M. H. Riordan. 1991. “High and Declining Prices Signal Product Quality.” American Economic Review 28 (1):224–39.Google Scholar

  • Bayus, B. L. 1995. “Optimal Dynamic Policies for Product and Process Innovation.” Journal of Operations Management 12 (3):173–85.CrossrefGoogle Scholar

  • Caulkins, J. P., G. Feichtinger, D. Grass, R. F. Hartl, P. M. Kort, and A. Seidl. 2015. “History-dependence generated by the interaction of pricing, advertising and experience quality.” Technical Report Research Report 2015–05, Vienna University of Technology.

  • Chatterjee, R. 2009. “Strategic Pricing of New Product and Services.” In Handbook of Pricing Research in Marketing, edited by V. Rao, 169–215. Northampton, MA, USA: Edward Elgar Publishing.Google Scholar

  • Chenavaz, R. 2011. “Dynamic Pricing Rule and R&D.” Economics Bulletin 31 (3):2229–36.Google Scholar

  • Chenavaz, R. 2012. “Dynamic Pricing, Product and Process Innovation.” European Journal of Operational Research 222 (3):553–7.CrossrefWeb of ScienceGoogle Scholar

  • Chenavaz, R., L.-P., L. Etienne Carrier, and C. Paraschiv. 2011. “Dynamic Pricing in Management Science.” Journal of Economic Studies and Research 10. doi:.CrossrefGoogle Scholar

  • Den Boer, A. V. 2015. “Dynamic Pricing and Learning: Historical Origins, Current Research, and New Directions.” Surveys in Operations Research and Management Science 20 (1):1–18.CrossrefGoogle Scholar

  • Dockner, E., S. Jorgenssen, V. N. Long, and S. Gerhard. 2000. Differential Games in Economics and Management Science. Cambridge: Cambridge University Press.Google Scholar

  • Ellingsen, T. 1997. “Price Signals Quality: The Case of Perfectly Inelastic Demand.” International Journal of Industrial Organization 16 (1):43–61.CrossrefGoogle Scholar

  • Gardner, D. 1971. “Is there a Generalized Price-Quality Relationship?” Journal of Marketing Research 8 (2):241–3.CrossrefGoogle Scholar

  • Gavious, A., and O. Lowengart. 2012. “Price–Quality Relationship in the Presence of Asymmetric Dynamic Reference Quality Effects.” Marketing Letters 23 (1):137–61.CrossrefWeb of ScienceGoogle Scholar

  • Gerstner, E. 1985. “Do Higher Prices Signal Higher Quality?” Journal of Marketing Research 22 (2):209–15.CrossrefGoogle Scholar

  • Janssen, M. C., and S. Roy. 2010. “Signaling Quality through Prices in an Oligopoly.” Games and Economic Behavior 68 (1):192–207.CrossrefWeb of ScienceGoogle Scholar

  • Jin, G. Z., and A. Kato. 2006. “Price, Quality, and Reputation: Evidence from an Online Field Experiment.” The RAND Journal of Economics 37 (4):983–1005.CrossrefGoogle Scholar

  • Jørgensen, S., and G. Zaccour. 2012. Differential Games in Marketing, Volume 15. New York, USA: Springer Science & Business Media.Google Scholar

  • Judd, K. L., and M. H. Riordan. 1994. “Price and Quality in a New Product Monopoly.” Review of Economic Studies 61 (4):773–89.CrossrefGoogle Scholar

  • Lambertini, L., and A. Mantovani. 2009. “Process and Product Innovation by a Multiproduct Monopolist: A Dynamic Approach.” International Journal of Industrial Organization 27 (4):508–18.Web of ScienceCrossrefGoogle Scholar

  • Li, G., and S. Rajagopalan. 1998. “Process Improvement, Quality, and Learning Effects.” Management Science 44 (11-part-1):1517–32.CrossrefGoogle Scholar

  • Milgrom, P., and J. Roberts. 1986. Price and Advertising Signals of Product Quality.” Journal of Political Economy 94 (4):796–821.CrossrefGoogle Scholar

  • Monroe, K. B., and W. B. Dodds. 1988. “A Research Program for Establishing the Validity of the Price-Quality Relationship.” Journal of the Academy of Marketing Science 16 (1):151–68.CrossrefGoogle Scholar

  • Mukhopadhyay, S. K., and P. Kouvelis. 1997. “A Differential Game Theoretic Model for Duopolistic Competition on Design Quality.” Operations Research 45 (6):886–93.CrossrefGoogle Scholar

  • Mulligan, C. B., and X. Sala-i Martin. 1991. “A Note on the Time-Elimination Method for Solving Recursive Dynamic Economic Models.” NBER Working Papers 116.

  • Mussa, M., and S. Rosen. 1978. “Monopoly and Product Quality.” Journal of Economic Theory 18 (2):301–17.CrossrefGoogle Scholar

  • Rubel, O. 2013. “Stochastic Competitive Entries and Dynamic Pricing.” European Journal of Operational Research 231 (2):381–92.CrossrefWeb of ScienceGoogle Scholar

  • Saha, S. 2007. “Consumer Preferences and Product and Process R&D.” The RAND Journal of Economics 38 (1):250–68.CrossrefGoogle Scholar

  • Scitovsky, T. 1944. “Some Consequences of the Habit of Judging Quality by Price.” Review of Economic Studies 12 (2):100–5.CrossrefGoogle Scholar

  • Shy, O. 2001. The Economics of Network Industries. Cambridge: Cambridge University Press.Google Scholar

  • Spence, M. 1975. “Monopoly, Quality, and Regulation.” Bell Journal of Economics 6 (2):417–29.CrossrefGoogle Scholar

  • Stiglitz, J. 1987. “The Causes and Consequences of the Dependence of Quality on Price.” Journal of Economic Literature 25 (1):1–48.Google Scholar

  • Sun, C.-J. 2014. Dynamic Price Discrimination with Customer Recognition.” The BE Journal of Theoretical Economics 14 (1):217–50.Google Scholar

  • Tapiero, C. S., P. H. Ritchken, and A. Reisman. 1987. “Reliability, Pricing and Quality Control.” European Journal of Operational Research 31 (1):37–45.CrossrefGoogle Scholar

  • Teng, J.-T., and G. L. Thompson. 1996. “Optimal Strategies for General Price-Quality Decision Models of New Products with Learning Production Costs.” European Journal of Operational Research 93 (3):476–89.CrossrefGoogle Scholar

  • Völckner, F., and J. Hofmann. 2007. “The Price-Perceived Quality Relationship: A Meta-Analytic Review and Assessment of its Determinants.” Marketing Letters 18 (3):181–96.CrossrefGoogle Scholar

  • Vörös, J. 2006. “The Dynamics of Price, Quality and Productivity Improvement Decisions.” European Journal of Operational Research 170 (3):809–23.CrossrefGoogle Scholar

  • Vörös, J. 2013. “Multi-Period Models for Analyzing the Dynamics of Process Improvement Activities.” European Journal of Operational Research 230 (3):615–23.Web of ScienceCrossrefGoogle Scholar

  • Wolinsky, A. 1983. “Prices as Signals of Product Quality.” Review of Economic Studies 50 (4):647–58.CrossrefGoogle Scholar

  • Xue, M., W. Tang, and J. Zhang. 2016. “Optimal Dynamic Pricing for Deteriorating Items with Reference-Price Effects.” International Journal of Systems Science 47 (9):2022–31.CrossrefWeb of Science

  • Yan, D., and J. Sengupta. 2011. “Effects of Construal Level on the Price-Quality Relationship.” Journal of Consumer Research 38 (2):376–89.CrossrefWeb of ScienceGoogle Scholar

  • Zhang, J., W.-y. Kevin Chiang, and L. Liang. 2014. “Strategic Pricing with Reference Effects in a Competitive Supply Chain.” Omega 44:126–35.Google Scholar

  • Zhou, K. Z., C. Su, and Y. Bao. 2002. “A Paradox of Price–Quality and Market Efficiency: A Comparative Study of the Us and China Markets.” International Journal of Research in Marketing 19 (4):349–65.CrossrefGoogle Scholar

About the article

Published Online: 2016-07-13

Published in Print: 2017-01-01

Citation Information: The B.E. Journal of Theoretical Economics, Volume 17, Issue 1, 20150062, ISSN (Online) 1935-1704, ISSN (Print) 2194-6124, DOI: https://doi.org/10.1515/bejte-2015-0062.

Export Citation

©2017 by De Gruyter.Get Permission

Citing Articles

Here you can find all Crossref-listed publications in which this article is cited. If you would like to receive automatic email messages as soon as this article is cited in other publications, simply activate the “Citation Alert” on the top of this page.

Régis Chenavaz
Applied Economics, 2017, Volume 49, Number 32, Page 3156

Comments (0)

Please log in or register to comment.
Log in