Fresh food quality grading is the basis of fresh food marketization. On the one hand, it can effectively improve the market efficiency of fresh food and improve the earnings of retailers. On the other hand, it can alleviate the incompleteness of market information and help consumers better identify the quality characteristics of fresh food. To address the issue of quality grading for fresh food, this study constructs a retailer profit model for selling fresh food with two quality grades. Considering the quality level distribution of fresh food and based on the quality selection model, the retailer’s optimal grading, pricing, and ordering of fresh food are studied. Through numerical simulation and sensitivity analysis, some conclusions with managerial implications are drawn. We find that the retailer has the optimal quality grading strategy for fresh food, which is influenced by the minimum quality level and the unit cost of fresh food. Raising the quality standard at the lowest level or reducing the unit cost can help the retailer increase the profits.
Food quality is becoming an increasingly important issue in our lives. Fresh food differs in appearance, size, color, defect degree, and other quality characteristics. For example, apples have different diameters. If a retailer adopts mixed packaging and mixed sales of fresh food, it is not beneficial to his sales nor can it meet the needs of consumers with different quality preferences. Moreover, shoddy products will directly affect consumers’ satisfaction with fresh food and their purchase decisions in the mixed sales mode. Consequently, the retailer needs to consider making pricing decisions based on certain quality standards.
Consumers are willing to pay higher prices for higher quality products [
However, many retailers have not realized the importance of quality grading for fresh food. They adopt a mixed sales approach and rely on low prices to attract users. These retailers are lagging behind the current trend of the fresh food market and thus may result in a small profit or even loss. For example, at the B2B website of “Yimutian” (a fresh food information service platform), fresh food from many suppliers (farmers) is in mixed sales at a low wholesale price. Meanwhile, little research has been performed on modeling how to determine the optimal quality grading and how the quality grading standard influences the pricing strategy for fresh food. Quality grading based on objective quality standards of fresh food is a key step for standardization. For example, enterprises can use quality standards based on product characteristics such as appearance and freshness to properly grade the quality of fresh food and quantify the corresponding consumer experience. These quality standards also have certain rules to follow. For example, the diameter of an apple tends to have a normal distribution distributed [
This article mainly has the following contributions. First, the quality grading standard of fresh food is taken as an endogenous decision-making variable by retailers based on consumers’ quality preference for fresh food. Second, we further study the retailer’s pricing and ordering decisions based on quality grading standards.
Our research aims to address the following questions: How to present the demand function according to consumers’ quality preference How to establish the quality grading standard of fresh food How does the optimal quality grading standard affect the retailer’s decision How do the parameters and variables in the model affect the retailer’s optimal pricing and ordering strategies
The rest of the study is arranged as follows. Section
This study is mainly related to three streams of literature: (1) quality grading of fresh food, (2) consumers’ purchase preference, and (3) pricing and inventory strategies of fresh food.
Several researchers have studied the effects of quality grading. It is important to grade fresh food as it meets consumers’ demand and preferences of different quality levels and improves the marketing efficiency of fresh food [
Most of the studies in this direction take the quality grading standard of fresh food as an exogenous variable for decision-making and do not explore the optimal quality grading standard. This study aims to determine the optimal quality grading standard of fresh agricultural products, which is the main contribution of this study.
With the help of the Internet and big data, companies can better understand customer behaviors and extract consumer preferences [
Customers’ quality preference drives the quality grading and pricing strategy of fresh food. Although the customers’ quality preference can be well captured in the big data era, little is known about how the decision of quality grading standard is related to customers’ quality preference. This study contributes to the extant literature by considering customers’ quality preferences when making quality grading and pricing decisions. Furthermore, we analyze the effect of the lowest product quality on the retailer’s optimal decisions.
Due to the perishability of fresh food, pricing and inventory strategies are important to the retailer’s profits. Akcay et al. [
Pricing and ordering strategies for agriproducts have been extensively studied, but little has been done on modeling how the retailer determines the optimal quality grading standards and makes pricing and ordering decisions based on grading standards. Furthermore, we incorporated the consumers’ quality preference for fresh food into the model, which makes this research more realistic.
Due to different planting conditions and growing environments, the same batch of fresh food may differ in defect degree, maturity, and appearance quality. If a retailer sells fresh food at the same price, consumers tend to buy the products with higher quality, leaving lower quality fresh food unsellable, making the retailer suffer profit loss. Therefore, the retailer needs to organise its fresh food into two or more quality grades according to a certain quality level and sell them separately to obtain higher profits [
Before sales, the retailer purchases fresh food with quantity
The quality grading model of fresh food.
Table
Notations description.
Notations | Description |
---|---|
Potential total demand for fresh food | |
The minimum quality level of fresh food | |
The unit cost of fresh food | |
The total supply of fresh food from the retailer | |
The fresh food quality grading standard, | |
Price of high quality fresh food | |
Price of low quality fresh food | |
Actual demand for fresh food with quality level | |
Actual supply for fresh food with quality level | |
The probability that consumers buy fresh food with quality level | |
The quality level of fresh food, | |
Profit of the retailer |
Since consumers have a certain preference in purchasing products of different quality levels, we study the overall consumer demand by referring to the quality selection model according to Tirole [
Due to the natural characteristics of fresh food, it is difficult to have a unified quality level. In addition, market information is incomplete, and consumers can only know the lowest and highest quality levels of products through part of the information disclosed by the retailer. Therefore, it is assumed that consumers use average quality levels to estimate the quality levels of high and low quality grades, i.e.,
Retailers are usually aware of the quality of the products they have purchased and can describe the product quality distribution through specific functions. According to the above problem description and hypothesis, the actual supply quantity of products with different quality grades is
In this study, we assume that consumers buy products with only one quality grade during the sales period, and every rational consumer will choose a product that maximizes utility. Therefore, the probability of consumers buying high quality fresh food is
The probability of consumers buying low quality fresh food is
The retailer makes price decisions based on the actual quantity of the two quality grades by maximizing its profit, i.e.,
According to the potential demand size of fresh food above, the actual demand of consumers for the two quality grades can be obtained, respectively, based on the quality selection model. Table
In Table
Actual demand for fresh food of high and low quality grades.
Conditions | ||
---|---|---|
0 | ||
Actual market demand for fresh food.
To make the research more practical, we mainly consider the situation of market demand in scenario II in Figure
In this situation, all consumers who choose to buy products are divided into two groups: one group chooses to buy high quality products and the other chooses to buy low quality products. Consumers’ demands for high and low grade products are as follows:
The retailer’s profit function can be expressed as follows:
According to equation (
Supply and demand relations for fresh food.
According to Figure
For the convenience of analysis, we assume that the quality level of products follows the uniform distribution of
When the total purchase quantity
The proof of Proposition
We analyze how the retailer makes pricing decisions when the demand for fresh food with both high and low quality levels coexists. According to Proposition
The retailer’s optimal pricing decision.
Conditions | ||
---|---|---|
Retailer’s optimal pricing strategy under the influence of
The retailer needs to determine the total order quantity
When the potential demand size When When When
The proof of Proposition
According to Proposition
(1) When
The proof of Corollary
To ensure that high quality fresh food is sold at high prices and to reduce the quantity of low quality fresh food, the retailer will increase the quality grading standard as the minimum quality level of fresh food increases. However, as the unit cost of fresh food increases, the retailer will gradually reduce the optimal quality grading standard for fresh food to avoid the profit loss caused by an excessive quantity of low quality products and to ensure the profit of high quality products. When the unit cost of fresh food is high, the retailer will keep the quality grading standard unchanged to achieve a balance between the supply and demand of both high and low quality products.
When
The proof of Corollary
When the unit cost of fresh food is moderate, the increase of the minimum quality level of fresh food raises its price, further increasing the retailer’s profit. As the unit cost of fresh food increases, the retailer will decrease the order quantity and quality grading standard to keep a balance between the supply and demand of both high and low quality fresh food. The retailer’s profit falls as the unit cost rises because the increase of revenue from a higher price cannot compensate for the decrease of revenue from reduced demand.
(1) The optimal purchase quantity
The proof of Corollary
Corollary 3 indicates that the unit cost of fresh food and the minimum level of quality affect the retailer’s order quantity. When the unit cost of fresh food is low, with the increase of the minimum quality level, high and low quality products are more competitive and substitutable. To prevent profit loss caused by an excessive surplus of products, the retailer will reduce the purchase quantity. When the unit cost of fresh food is high, the retailer will raise its price, leading to the increase of quality grading standard. Meanwhile, the supply of high quality fresh food will decrease as the quality grading standard increases. Therefore, the retailer will gradually increase the supply of fresh food to ensure that all fresh foods can be sold at relatively higher prices.
To better analyze how relevant parameters affect the retailer’s optimal decisions, this section assumes that the value of parameters satisfies
The influences of
Figure
We set the value of parameters
The influences of the lowest quality level
Figure
The above analyzes indicate that when the unit cost of fresh food is constant, the retailer can increase profits by improving the minimum level of quality. Meanwhile, with the increase of the minimum quality level, the market competition of products with two quality grades is enhanced. The retailer can achieve profit growth by reducing the total order quantity with two quality grades and increase the standards of quality grading.
First, we set the value of parameters
The influences of unit cost
As shown in Figure
Based on the above analysis, it is clear that the mixed sales mode for fresh food has a number of disadvantages. On the one hand, it is difficult to meet the needs of consumers with different quality preferences. On the other hand, the failure of selling low quality products will cause the retailer to lose profits. Due to the timeliness and perishability of fresh food, the differentiated sales mode based on quality grading of fresh food can effectively promote the sales of fresh food and reduce the profit loss caused by unsalable products.
Therefore, we consider a situation in which a retailer sells fresh food of two quality grades. That is, fresh food is divided into high and low quality grades based on its quality distribution. Considering consumers’ preferences of quality levels, a quality selection model is used to describe consumers’ purchase behavior. By building the retailer’s profit function, we analyze its optimal purchase quantity, grading standard, pricing, and profit under the condition of quality grading, as well as the effects of the lowest quality and unit cost on the retailer’s optimal decisions. The main conclusions are as follows: There is an optimal strategy for quality grading of fresh food, which is affected by factors such as the lowest quality, unit cost, and quality level distribution of fresh food. The retailer can explore the optimal quality grading strategy according to the actual situation and make pricing and ordering decisions based on quality grading to maximize his profit. When the lowest quality level of fresh food remains unchanged, the retailer’s total profits may not be positively correlated with the total order quantity. For example, if the unit cost of fresh food is very low, the retailer’s profit in the situation of “oversupply” may be higher than that when there is a good “balance of supply and demand.” Raising the lowest quality level is conducive to increasing the retailer’s profit from differentiated sales. The prices of products with high and low quality grades increase with the minimum quality level.
This study also has some limitations. First, we consider only two grades of quality (i.e., high and low), and product quality obeys uniform distribution. Nonetheless, the real situation may be more complex. For example, product quality is classified into multiple levels and has a more complex distribution. Second, we only study quality grading and pricing strategies of fresh food from the perspective of retailers. The decisions from the perspective of food supply chains by considering the interests of upstream producers are short of study. By analyzing these issues, we hope to provide retailers with some management insights and practical guidance in decision-making.
According to the retailer’s revenue function, the retailer’s optimal decision can be divided into four scenarios as shown in Figure Scenario 1:
The first derivative is
Due to second derivative,
Therefore, the profit function of the retailer is the joint concave function of
KKT conditions are as follows:
Three possible solutions are obtained:
According to equation (
And when
The Hessian matrix is
Due to
The Hessian matrix is a negative definite matrix, the objective function is strictly concave, and there is a maximum.
Owing to
Therefore, when If If
And when
According to the KKT condition, the two sets of solutions are
To sum up, by comparing the optimal profit values of the three subregions of the profit function, the following conclusions can be drawn: When The retailer’s optimal decision is When When
When When When When
When
And when
According to Proposition
According to Appendix 3, we can get (i) When When
No data were used to support this study.
The authors declare that they have no conflicts of interest.
This work was supported by the National Natural Science Foundation of China (71771053 and 71371003), the Natural Science Foundation of Jiangsu Province (BK20201144), and the Key Research and Development Plan (Modern Agriculture) of Jiangsu Province (BE2018385).