A Dynamic Model of Product Quality and Pricing Decisions on Sales Response

This paper presents a dynamic model that examines the influence of price and customer perception of product quality on the sales rate of a firm producing durable goods. The sales rate of the firm is modeled as a function of its price, average product life, perceived quality, and market potential. Specifically, the model considers: (1) the process by which perceived quality is determined by including the effects of the average life of a product and quality weighted units in the market; (2) the time delay in the influence of actual quality on perceived quality; (3) the process by which demand (i.e., potential sales) is converted to realized sales due to the effects of price and perceived quality; and (4) the saturation effect and associated non‐linearity in the demand function. The model presented is a reformulation and extension of the model originally proposed by Bass [2]. The validity of the model is tested using historical data on For Mustang.