Analysis of Product Introduction Strategies in the Presence of Price–Quality Heuristic

Abstract

How to launch multiple versions of a product sequentially into the market is always an important but challenging question. In this article, we consider the price–quality heuristic, namely consumers' strategic deliberation when they use prices to infer product quality over different versions, and employ an analytical model focusing on how the presence of the price–quality heuristic affects the firm's decision on product introduction strategies. Our analysis yields three main insights. First, in the presence of the price–quality heuristic, even though the sales of the earlier version are low, it can serve as a reference for consumers to better understand the quality improvement in the later version, therefore, can bring more profits to the firm. Second, when consumers use prices to infer product quality, the firm can benefit from consumers' strategic deliberation over different versions. Third, as the intensity of the price–quality heuristic becomes stronger, the firm's optimal pricing strategy switches from mark-down to mark-up. In an extension, we find that the trade-in program is optimal when quality improvement is big, but the price–quality heuristic undermines the advantage of the trade-in program. Our analysis indicates that the firm should carefully evaluate how consumers interpret product quality via prices when devising its product introduction strategy.