Dual-role based pricing in a dynamic and competitive environment

G. E. Fruchter

Research output: Contribution to journalArticlepeer-review

1 Scopus citations


The dual role of price, as a product attribute signaling quality and as a measure of sacrifice, serving as a benchmark for comparing the utility gains from superior product quality, is now well established in the marketing and economic literature. However, knowledge about their long-run impact and the influence of competition on these effects still remains very sparse. In the current paper, with reference to a dynamic and competitive framework, an analytical model is proposed to help determining optimal decision rules for price incorporating both roles. The main results are as follows: (i) The optimal pricing policy is determined as a Nash equilibrium strategy. (ii) The resulting equilibrium price is higher than an equilibrium that disregards the carryover price effects. (iii) For a symmetric competition, we provide normative rules on how firms should set prices as a function of the perceived quality; particularly, how the price should be set initially, when there is little product familiarity and the perceived quality is low, and how this price should vary as the perceived quality increases. (iv) At steady state, we find that the level of equilibrium margin, in percentage terms, decreases with the elasticity of demand with respect to the brand price, but this decrease is moderated by the elasticity of demand with respect to the brand perceived quality, the cross elasticity of demand with respect to the competitor's perceived quality and the effect of the competitor's current price on the firm's perceived quality deterioration.

Original languageEnglish
Pages (from-to)27-44
Number of pages18
JournalJournal of Optimization Theory and Applications
Issue number1
StatePublished - Jul 2008


  • Differential games
  • Marketing
  • Nash equilibrium
  • Perceived quality
  • Price
  • Price signaling quality


Dive into the research topics of 'Dual-role based pricing in a dynamic and competitive environment'. Together they form a unique fingerprint.

Cite this