Price and Quality Decisions in Heterogeneous Markets

Document Type: Article

Authors

1 Department of Industrial Engineering, Sharif University of Technology, Tehran, Iran.

2 Department of Industrial Engineering, Sharif University of Technology, Tehran, Iran

Abstract

This paper analyzes the optimal price and quality decisions of a retailer for its different
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 identified based on income disparity can have important implications
for a retailer’s optimal policy. The specific objective of this paper is to investigate how the
distribution of consumers’ types in the market and their travel costs affect the optimal setting
of price and quality levels among different stores of a retailer. Our results express that the
geographical disparity of willingness to pay plays a significant role in the differentiation 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.

Keywords