Production quality and pricing strategy for substitutable products under comparison effects

Abstract

Comparison effects have been studied extensively in many fields. In particular, existing operations management articles have discussed the impact of comparison effects on enterprises' production and pricing decisions. Research has also shown that consumers' purchasing decisions are primarily determined by three factors: product quality, selling price, and comparison effects. The current study introduces the concepts of social and temporal comparison effects to examine how comparison effects influence a monopolist’s production quality and pricing strategy for substitutable products. Results reveal the following: (1) Setting different prices for even two types of substitutable products with negligible quality differences can divide customers into three groups under the influence of social comparison effects in a single-stage model. (2) The monopolist should avoid using a price discrimination strategy in which products with a short market life cycle have the same quality but different prices. (3) When the market life cycle of products is sufficiently long in the single-product market and the market with two substitutable products, the monopolist’s optimal choice in the second stage is to keep production quality constant and increase the selling price. Consequently, the number of buyers does not decrease because of temporal comparison effects. Therefore, the firm increases its revenue. (4) For the market with two substitutable products with quality differences, one approximate optimal strategy for the enterprise in the second stage is to keep the selling price constant with the assumption that product quality cannot be adjusted after the first period. At this point, the consumption situation in the market is the same as that in the first stage. Therefore, when no external constraints exist, the monopolist firm can obtain more benefits in the second stage than in the first stage by exploiting the temporal comparison effects of consumers in the second stage. (5) When consumer identity information can be confirmed in the market, social comparison effects, similar to temporal comparison effects, could help the enterprise increase its price and profit while maintaining product quality. These social and temporal comparison effects constrain consumers. Thus, the number of people who continue to buy products does not decrease.