Changes in product quality and consumer responses

Western Australian Centre of Excellence in Industrial Optimisation
Publication Type:
Conference Proceeding
Proceedings of the 18th National ASOR Conference & 11th Australian Optimisation Day, 2005, pp. 67 - 74
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This article examines the dynamic relationship between a firm's decision to vary the quality of a product, consumer responses to this variation, and the ffect this could have on the firm's profit and value. This is achieved through the construction and anlysis of a discrete-time optimal control model which incorporates consumer response. The consumer response model is based on sampling the product's market prior to the reduction in quality. The model is then solved numerically. The optimal time to reduce quality is shown to be affected by the ratio of price and cost differentials associated with differences in quality and the shareholder's required rate of return.
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