Responsive Pricing and Product Quality of Fashion Goods

32 Pages Posted: 20 Dec 2023 Last revised: 31 Jan 2024

See all articles by Baojun Jiang

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School

Yannan Jin

Shanghai University of Finance and Economics

Chongguang Liu

affiliation not provided to SSRN

Hang Wei

Shanghai University of Finance and Economics - College of Business

Date Written: December 11, 2023

Abstract

In the fashion industry, manufacturers exert great efforts in product innovations to improve product quality. Investing in such endeavors is expensive, and the market may have much demand uncertainty that can affect product sales. In practice, responsive pricing is commonly used to mitigate the risk or effect of demand uncertainty. In a decentralized channel, product quality is often designed by the brand-owning manufacturer, while responsive pricing is usually implemented by the retailer. We build an analytical model to study how the retailer’s responsive pricing in a two-period selling season affects the manufacturer’s quality-investment decision and the profitability of firms. We find that if the consumers’ valuations for quality are sufficiently homogeneous, the retailer’s responsive pricing will dampen the manufacturer’s quality investment. If the consumers’ valuations for quality have an intermediate level of heterogeneity, the retailer’s responsive pricing will induce the manufacturer to increase its quality investment. Furthermore, we find that because of the manufacturer’s strategic wholesale pricing decision, the retailer’s responsive pricing can lead to a win-win or lose-lose outcome. As the second-period market size increases, the retailer’s responsive pricing is more likely to increase the manufacturer’s product quality and profit but can be more likely to reduce the retailer’s profit.

Keywords: responsive pricing, product quality, profitability, decentralized channel

JEL Classification: M2, M3

Suggested Citation

Jiang, Baojun and jin, yannan and Liu, Chongguang and Wei, Hang, Responsive Pricing and Product Quality of Fashion Goods (December 11, 2023). Available at SSRN: https://ssrn.com/abstract=4660139 or http://dx.doi.org/10.2139/ssrn.4660139

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States
3149353315 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/Jiang/

Yannan Jin

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Chongguang Liu (Contact Author)

affiliation not provided to SSRN

Hang Wei

Shanghai University of Finance and Economics - College of Business

777 Guoding Road
Shanghai, 200433
China

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