Equilibrium decisions for multi-firms considering consumer quality preference

Abstract

Consumer preferences for different levels of product quality have become increasingly diverse. Thus, more and more firms are providing products with a variety of quality levels, in order to satisfy consumer demands. This study develops a premium-product supply chain optimization model. The model contains multi-firms who compete in a common market. Each firm adopts a vertical integration strategy and must determine which quality levels to produce, as well as the production quantities for each level. Using the variational inequality theory, the optimization model is formulated as a variational inequality problem. This assumes that each firm seeks to maximize its profit; the problem can be efficiently solved by an Euler algorithm. A case study focusing on the fashion and apparel market is presented. Numerical results indicate that firms tend to produce more high-quality goods as consumer preferences for high-quality goods increase. Moreover, from the perspective of industry, it might not always be profitable if firms produce completely differentiated products (in terms of quality levels) as a means to reduce competition. When the level of consumer quality preference reaches a certain level, it might be more beneficial to the industry if some (but not all) firms stop producing lower-quality products.