A dynamic pricing model with goodwill influenced by price-quality effect

In this paper, we consider an important phenomenon of price-quality effect in goodwill formulation process, that high price indicates high quality thus has a positive impact on goodwill. Based on the familiar Nerlove-Arrow model, we set up a dynamic model, in which the firm maximises its profit by setting optimal price and quality, with the consideration of price-quality effect, i.e., high price could increase the sales through enhancing the goodwill if quality has reached a threshold level. Our result shows that 1) in the high quality strategy scenario, the quality is set at the quality threshold of the existence of price-quality effect, and the optimal price is increasing in the degree of price-quality effect and the quality threshold; 2) in low quality strategy scenario, the quality is set at zero, and the optimal price is decreasing in the quality threshold. Copyright © 2014 Inderscience Enterprises Ltd.