Price-quality relationship in the presence of asymmetric dynamic reference quality effects

Arieh Gavious, Oded Lowengart

Research output: Contribution to journalArticlepeer-review


The purpose of this study is to examine the relationship between price and reference quality and their combined effect on profits. An analytical modeling approach aimed at solving the optimal solution for the profit maximization problem under these conditions is developed, enabling the exact path of the optimal price and quality over time to be depicted. Based on separating the effects of price and reference quality on demand, this analysis also provides insight into the contribution of these two effects to the steady-state solution through elasticities. Our results show that a monotonic inverse relationship exists between price and quality, such that a steady-state level is obtained where the quality-price ratio is lower when reference quality effects exist than when such effects do not exist. In other words, consumers obtain higher quality for a higher price but with a lower price per unit of quality. Overall, accounting for reference quality effects will increase a firm's profits.

Original languageAmerican English
Pages (from-to)137-161
Number of pages25
JournalMarketing Letters
Issue number1
StatePublished - 1 Mar 2012


  • Differential games
  • Equilibrium
  • Optimal pricing
  • Price elasticity
  • Reference quality

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Economics and Econometrics
  • Marketing


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