Price and Quality Decisions in Heterogeneous Markets

This paper analyzes the optimal price and quality decisions of a retailer for its differentstores in a heterogeneous market. The consumers are assumed to be heterogeneous in theirwillingness to pay for quality and are non-uniformly distributed in the market. This type ofheterogeneity which is identified based on income disparity can have important implicationsfor a retailer’s optimal policy. The specific objective of this paper is to investigate how thedistribution of consumers’ types in the market and their travel costs affect the optimal settingof price and quality levels among different stores of a retailer. Our results express that thegeographical disparity of willingness to pay plays a significant role in the differentiation andtargeting strategy of a retailer. Comparative analysis shows that the widely adopted assumptionof uniform distribution of consumers in the literature leads to non-optimal decisions where thedistribution of consumers is non-uniform in a real-world situation.