Price and Quality Decisions in Heterogeneous Markets

Abstract

This paper analyzes the optimal price and quality decisions of a retailer for its dierent stores in a heterogeneous market. The consumers are assumed to be heterogeneous in their willingness to pay for quality and are non-uniformly distributed in the market. This type of heterogeneity which is identied based on income disparity can have important implications for a retailer's optimal policy. The specic objective of this paper is to investigate how the distribution of consumers' types in the market and their travel costs aect the optimal setting of price and quality levels among dierent stores of a retailer. Our results express that the geographical disparity of willingness to pay plays a signicant role in the dierentiation and targeting strategy of a retailer. Comparative analysis shows that the widely adopted assumption of uniform distribution of consumers in the literature leads to non-optimal decisions where the distribution of consumers is non-uniform in a real-world situation.