Joint price and quality decisions considering Chinese customers' variety seeking behavior

Abstract

Variety seeking behavior indicates that customers get boredom of the products they purchased before, and prefer new products when they want to purchase again. Considering this, firms have to adjust their price and quality decisions to keep “old” and find “new” customers. In this paper, we build a two-period stylized model by assuming firms' cost is effort-dependent, which characterizes the tradeoff between managing variety seeking customers and the cost of quality improvement. We show that, customers' variety seeking behavior leads to a mild competition in period 1 but a fierce competition in period 2, and the existence of variety seeking customers reduces firms' incentives to improve the quality levels. Regarding price decision, we find that firms charge a low retail price in period 2, but in period 1 the price depends on the effort cost coefficient. Interestingly, we find that firms may be worse off in a mixed market of both regular and variety seeking customers, when the effort cost coefficient is small. That is, firms' highly efficient quality improvement can be harmful when customers are variety seeking.