The Joint Determination of Price, Quality, and Capacity: An Application to Supermarket Operations

Abstract

This paper focuses on a service provider who, faced with competition, must determine the optimal price and level of service quality to provide in order to maximize profits. Service quality and price are assumed to impact jointly on demand for services. Both demand and service quality impact on the cost of providing service. While a considerable literature exists on the impact of service quality on demand or cost, less work has focused on the explicit impact of service quality jointly on both demand for and the cost of providing services. A service quality constraint is appended to the formulation in order to guarantee that a declared service standard is met. Conditions are developed which characterize optimal solutions, together with comparative statics. Illustrative results are presented based on empirical data obtained from a supermarket study.