A Dynamic Analysis of a Monopolist’s Perceived Quality with Product Innovation and Reference Price

In this paper, we develop a dynamic analysis model to investigate a monopolist’s perceived quality with product innovation and reference price effects, in which price and reference price are used both as a signal of quality, while product quality and advertising effort are used only as a signaling device. We show that (i) the stability of steady-state equilibrium depends on the admissible parameters; (ii) there is always a fixed proportional relationship between the efforts for product innovation and improving perceived quality; (iii) there is always a positive relationship between the price and product quality (or price and perceived quality; price and reference price).