Abstract
This paper focuses on a service provider who, faced with competition, must determine the optimal price and level of service quality to provide in order to maximize profits. Service quality and price are assumed to impact jointly on demand for services. Both demand and service quality impact on the cost of providing service. While a considerable literature exists on the impact of service quality on demand or cost, less work has focused on the explicit impact of service quality jointly on both demand for and the cost of providing services. A service quality constraint is appended to the formulation in order to guarantee that a declared service standard is met. Conditions are developed which characterize optimal solutions, together with comparative statics. Illustrative results are presented based on empirical data obtained from a supermarket study.
Highlights
Introduction and Literature ReviewThe issue of service quality has become prominent in the development of strategies employed by firms seeking competitive advantages (Headley and Choi, 1992)
This paper has considered the joint determination of price, service quality, and a local operating variable for a firm whose objective is profit maximization
This paper develops a model through which both price and quality of service may be determined, in addition to other variables more operational in nature, such as capacity
Summary
The issue of service quality has become prominent in the development of strategies employed by firms seeking competitive advantages (Headley and Choi, 1992). It is assumed that quality impacts on both demand for and the cost of providing services, and that in addition to price and service quality recommendations, operational decisions, such as capacity allocation, must be made Both quality and price have been noted as important attributes that impact on demand (Berry, Zeithaml, and Parasuraman, 1990), as well as a firm’s ability to remain competitive in a market economy (Lewis, 1989). The net result of the analysis provides optimal price and service quality recommendations, but simultaneously results in operational decisions, such as capacity allocation This approach has been encouraged in the treatment of service quality issues (Sasser, Olsen, and Wyckoff, 1976).
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