Price and quality decisions in heterogeneous markets

The present study analyzes the optimal price and quality decisions of a retailer for its different stores in a heterogeneous market. The consumers are also assumed to be heterogeneous in terms of their willingness to pay for quality who 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 main objective of this study is to determine how the distribution of different types of consumers in the market and how their travel costs affect the optimal setting of price and quality levels among different stores of a retailer. According to the findings of this study, the geographical disparity of willingness to pay plays a significant role in differentiation and targeting strategy of a retailer. Furthermore, a comparative analysis revealed that the widely adopted assumption of uniform distribution of consumers in the literature would lead to non-optimal decisions in which the distribution of consumers is non-uniform in a real-world situation. (C) 2021 Sharif University of Technology. All rights reserved.