Quality, Class, and Competition

Abstract

This paper integrates the process oriented view of quality in manufacturing with the multi-attribute product positioning and customer preference models of marketing, within the context of traditional economic models of markets and competition. In manufacturing applications, “quality” is often defined as conformance to specifications or as meeting standards on the performance of the product. In the marketing and economics literature, “quality” typically refers to the performance level or “class” of the product. To capture both perspectives, a product is described by a vector of performance attributes, and the population of produced units is assumed to display a distribution on these attributes. The distribution perceived by customers may differ from the actual. The attribute levels (means) may be taken to define the class, or performance of the product. Quality in the sense of conformance is then conceptually identified with the absence of variation of the population. Consumer preferences are modelled by a cardinal utility function defined on the vector of attributes and price, and customers maximize expected utility. Product manufacturers are assumed to face a cost of producing a given population distribution. Under specific assumptions regarding costs and utility functions, models of monopoly, oligopoly and perfect competition are formulated. The model clarifies the distinction between product class (performance) and conformance quality, identifies the sources of quality improvement, and provides an economic framework relating issues like product positioning, process improvement, quality function deployment (QFD) and customer preference estimation. This framework is used to address issues such as quality costs and benefits and the economics of investments in quality.