The making of a "hot product": A signaling explanation of marketers' scarcity strategy

    Authors

    A. Stock;S. Balachander

    Comments

    Authors: contact us about adding a copy of your work at STARS@ucf.edu

    Abbreviated Journal Title

    Manage. Sci.

    Keywords

    game theory; marketing strategy; signaling; pricing research; product; management; QUALITY; PRICE; WARRANTIES; DEMAND; DESIGN; Management; Operations Research & Management Science

    Abstract

    Every marketer's dream is to create a "hot product" that customers would absolutely want to have, thus generating considerable profit to the marketer. According to one school of thought, marketers should make products hard to get in order to create really hot products. In this paper, using a game-theoretic model, we investigate if such scarcity strategies can indeed be optimal. While a scarcity strategy may appear to be a viable approach for making a firm's product successful, further analysis raises some puzzling issues. In particular, it is not clear why a firm would not increase its price to get demand and supply in sync and increase its profit in the process. We therefore offer a signaling explanation for the optimality of such strategies and show that a high-quality seller may optimally choose to make the product scarce in order to credibly signal the quality of its product to uninformed customers. Our analysis indicates that a high-quality seller optimally employs scarcity as a signaling device in product markets that are characterized, ceteris paribus, by a small difference in marginal cost between high- and low-quality products, a low reservation price for a low-quality product, a greater heterogeneity in reservation prices for a high-quality product, and a moderate number of informed consumers. Our results provide a rationale for the fact that scarcity strategies are usually observed for discretionary or specialty products, but not for commodity products, staple products, or new-to-the-world products.

    Journal Title

    Management Science

    Volume

    51

    Issue/Number

    8

    Publication Date

    1-1-2005

    Document Type

    Article

    Language

    English

    First Page

    1181

    Last Page

    1192

    WOS Identifier

    WOS:000232151900002

    ISSN

    0025-1909

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