Research On Vertical Differentiated Product Pricing Considering Fairness Preference

With the steady development of the economy, the substance is greatly enriched, and the differentiation in the market product is obvious. A lot of companies tend to offer more than one level of quality substitutable products to consumers. Especially, after China’s entry into the World Trade Organization, foreign advanced enterprises had a tremendous impact on the domestic market, such as the automotive industry, the machine industry, and the electronics industry. In order to win the optimization of enterprise profit, both domestic and foreign enterprises need to make reasonable price decisions for the fixed quality level of product. So it is essential to make appropriate price for competitive survival.For the above research on product pricing, the existing literature is often based on the assumption that the participant is rational. However, the company decision makers are usually not fully rational economic men. In market competition, there may be fairness preference between the rivals. When the enterprise market profits or market share below a certain level, they generate a jealous disutility of psychological and don’t make entirely rational decision.This dissertation based on the model of product vertical differentiation. We study the pricing models with considering company decision makers are fairness preferences, incompletely rational psychology. In the first part of this thesis, we assumed the duopoly market is consisted of a high-quality company and a low-quality company, and figured out optimal pricing and maximum profit under fully rational assumption. Secondly, the market model is considered as one single high-quality or one single low-quality company with fairness preference. In the utility function of the company, a fair perception function is increased to affect the final decision of the company. The final pricings of both company and the utility function are analyzed. It concludes that the fairness preference psychology will enable the company to reduce the price. Thirdly, both companies on the market are set with fairness preference in the model. The optimal pricing is discussed and analyzed according to the parameter of each case. Finally, we use the MATLAB software to analysis example and draw conclusions by describing the models.