OPTIMAL STRATEGIES FOR GENERAL PRICE-QUALITY DECISION-MODELS OF NEW PRODUCTS WITH LEARNING PRODUCTION COSTS

The question of product quality permeates every level of business and is becoming crucial for the survival of modem manufacturing firms in a utomotive and high-tech industries. In this paper, we deal with the op timal price and quality policies for the introduction of a new product . On the supply side, the firm wants to determine the unit price and q uality level over time given that unit cost declines along a learning curve, and increases if quality is made greater, On the demand side, d ynamic demand is related to price and quality, as well as to cumulativ e sales (which represent diffusion and saturation effects). We will mo del this problem in a general framework that includes several previous results as special cases. By applying the maximum principle, we will derive the optimal price and quality policies and discover the interac tions between these two major strategic marketing instruments, and the diffusion process, Several fundamental theoretical results will be es tablished for the model. Under certain specified conditions higher pri ces do imply higher quality, and under other conditions the optimal pr ice declines over time while the product quality improves. To illustra te these results, the theoretical results are applied to two specific- cases:the first one is a simple nonseparable demand growth function in price and quality, the other is a separable demand function of price and quality.