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MANAGEMENT
SCIENCE
inlJUa
Vol. 51, No. 8, August 2005, pp. 1181-1192 DOI i0.1287/mnsc.l050.0381
ISSN0025-19091EissN 1526-55011051510811181 ? 2qo5 INFORMS
Subramanian Balachander
Krannert Graduate School of Management, Purdue University, West Lafayette, Indiana 47907,
sbalacha@mgmt.purdue.edu
marketer's dream is to create a "hot that customers would want to have, thus
product" absolutely
Every considerable to the marketer. to one school of marketers should make
generating profit According thought,
hard to get in order to create hot In this a model, we
products really products. paper, using game-theoretic
investigate if such scarcity strategies can indeed be optimal. While a scarcity strategy may appear to be a viable
for making a firm's successful, further raises some issues. In
approach product analysis puzzling particular,
it is not clear why a firm would not increase its price to get demand and supply in sync and increase its
in the process. We therefore offer a for the of such and show
profit signaling explanation optimality strategies
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
as a device in markets that are characterized, ceteris a small
employs scarcity signaling product paribus, by
difference in cost between and a low reservation for a
marginal high- low-quality products, price low-quality
a in reservation for a and a moderate number of
product, greater heterogeneity prices high-quality product,
informed consumers. Our results a rationale for the fact that scarcity are observed
provide strategies usually
for or but not for or new-to-the-world
discretionary specialty products, commodity products, staple products,
products.
1181
Stock and Balachander: A Signaling Explanation ofMarketers' Scarcity Strategy
1182 Management Science 51(8), pp. 1181-1192, ?2005 INFORMS
Harvard Business Review have given greater promi from informed consumers. In this way, scarcity cred
nence to such "scarcity" strategies by suggesting that ibly signals to uninformed consumers that informed
these be part of the marketer's toolkit (Dye 2000, consumers are the product, which therefore
buying
Brown 2001). However, when subject to hard-nosed must be of high quality. Our extended analysis also
analysis, the scarcity strategy employed by Sony and shows that scarcity can be at least as efficient as unin
the other firms some issues. Why formative as a
raises puzzling advertising signaling device.
would the firm not increase its introductory price in Although scarcity strategies as described above
order to get demand and supply in sync, and increase have been part of marketing re
folklore, they have
its profit in the process? At that time, Sony's Playsta ceived little attention in the marketing literature. The
tion 2 was being traded for up to 300% of its price in economics literature offers some
explanations, but
auctions, which suggests that Sony was leaving some these have not involved signaling. In an interest
money on the table. Alternatively, firms could delay ing paper, Becker (1991) shows that when there are
introduction of the product until they have accumu positive demand due to social reasons,
externalities
lated enough inventory to meet the demand. Thus, it a restaurant may have queues for tables but
long
is not clear that a firm benefits from scarcity strate would still not raise prices. The rationale is that the
gies, especially if it underproduces a "hot" product. demand externalities may cause the demand curve
Also, if scarcity is such an effective marketing strat to slope upwards at the capacity level of the restau
egy, why is it not used more extensively? rant, reaching
a maximum
price
at some
larger quan
In this paper, we offer a signaling explanation for tity. The restaurant chooses this maximum price and
this puzzling a model similar has excess demand because the quantity demanded
phenomenon. Using
to Bagwell and Riordan (1991), we consider a seller exceeds its capacity. Although Becker's result extends
with private information about quality facing both beyond restaurants, his explanation hinges on capac
informed (expert) and uninformed consumers, with ity being determined before demand is known. If
the informed consumers earlier than the unin capacity choice is allowed, a restaurant may add
buying
formed consumers. To signal quality to uninformed tables so that the excess demand would disappear. In
consumers, the seller could choose to make the prod a different model, DeGraba (1995) allows for capacity
uct scarce (through the choice of production quantity) choice in addition to choice of price and shows that
or use price or uninformative as signals. a seller may produce less than demand to create a
advertising
We then show that product scarcity can be an optimal buying frenzy among customers before they become
a to
strategy for seller credibly signal to uninformed informed about their need for the product. Because
consumers that the product's quality is high. Signal uninformed customers have more homogeneous val
ing of quality through price has received consider uations, the scarcity enables better capture of the cus
able attention in the marketing literature (Rao and tomer surplus by the seller.
Monroe 1989, Bagwell and Riordan 1991, Moorthy Unlike Becker (1991), we do not assume demand
and Srinivasan 1995). Our model extends the strategy externalities and we allow the seller to choose a
for with amount that can meet demand. In both
space by allowing signaling scarcity. Inter production
we show that can Becker (1991) and DeGraba (1995), the scarcity alone
estingly, signaling through scarcity
be more efficient than price under some conditions. does not change customers' beliefs about the value
The key to the intuition is that scarcity affects only or quality of the product, contrary to the anecdo
later buyers as the seller runs out of the product, tal evidence presented earlier. In contrast, our model
while a price distortion affects all buyers. Because offers a mechanism for how seller-induced scarcity
the later buyers are the uninformed consumers in can favorably influence customers' beliefs about the
our model, a scarcity strategy affects only the sales quality of the product. Moreover, some customers
from such consumers, unlike a
signal produced by will be disappointed (derive negative surplus) ex post
price distortion. Furthermore, because a with their purchase in DeGraba's model, having made
low-quality
seller who pretends to offer a high-quality product the purchase while uninformed. On the contrary, in
to make his sales from uninformed consumers our signaling model, all customers correctly value the
expects
alone, such a pretender is hurt more effectively by the product before purchase in the separating equilib
scarcity strategy. Thus, the scarcity strategy
can allow rium, so that the surplus remains positive even after
the high-quality seller to separate more efficiently purchase. This feature of our model is consistent with
than with a price distortion by sacrificing profits from the high post-purchase satisfaction for scarce prod
uninformed consumers in order to retain more profits ucts such as Sony Playstation 2 and the Mazda Miata.
Lastly, DeGraba's results depend on the product being
to be consistent with aspects of the video console a new product of uncertain quality. The seller knows
and the automobile examples, we emphasize that the quality of the product but some consumers cannot
our signaling explanation does not preclude alternate ascertain the quality before purchase and use of the
explanations for instances of product scarcity. In par product. Similar to the existing literature (Moorthy
ticular, the scarcity of fashion products such as the and Srinivasan 1995, Zhao 2000), we assume that the
Prada boots cited earlier can also be driven by a con quality, q, can be either high (H) or low (L). Ini
sumer need for exclusivity.2 We briefly discuss this we assume that both and
tially, high- low-quality
issuefurther in the concluding section. products have the same constant marginal costs of
Consistent with our researchers assumed to be zero without loss of gen
signaling model, production,
in psychology have studied the effect of scarcity erality. This assumption can be justified on the basis
on customer beliefs about a (see Pratkanis of the following arguments: First, the use of total
product
and Farquhar 1992 for a review). Lynn (1992) argues quality management (TQM) techniques may enable
that people's high value for scarce products may the production of a high-quality product at the same
be attributable to naive economic theories, i.e., they marginal cost as a low-quality product (Walton 1986).
believe that scarce goods are more expensive, more Second, Srinivasan and Lovejoy (1997) show that
are or
expensive goods of higher quality represent superior product design from the point of view of cus
higher status, and consequently, those goods are more tomers does not necessarily entail a higher production
desirable. In contrast to these papers, we simulta cost. Last, by assuming identical costs for high- and
neously consider the incentives for sellers, including low-quality sellers, we abstract away from the well
their incentives to fool customers to facilitate sig
by using scarcity, understood ability of cost differences
while proposing an explanation for how scarcity can (cf. Bagwell and Riordan 1991, Simester 1995).
naling
be a credible a In doing
signal of product's quality. More importantly, with this abstraction, we are able to
so, we also consider the seller's price and quantity show how scarcity can be a signal when a more tradi
decisions. tional instrument such as price fails to signal quality.
Our model contributes to the signaling literature Later, we consider the case where high quality costs
by showing that scarcity can be a
signal of quality. more, with a marginal cost of production given by c
Other signals of quality that have been studied in the (c>0).
literature include price (Bagwell and Riordan 1991),
and Srinivasan 2.1. Consumers
money-back guarantee (Moorthy
1995), umbrella (Wernerfelt 1988), We focus our analysis on the introductory period in
branding slotting
which a mass M of consumers, each with a
allowances (Lariviere and Padmanabhan 1997), adver poten
tising (Milgrom and Roberts 1986, Desai 2000, Zhao tial demand of one unit of the new product, enter
2000), and warranty (Lutz 1989, Gal-Or 1989, Bala the market. These consumers subsequently exit the
chander 2001). In addition, of market at the end of the period. Our one-period anal
signaling price image
has been studied (Simester 1995). ysis can be readily extended to a multiperiod frame
The rest of the paper is organized as follows. In ?2, work as discussed in ?4. We assume that consumers
we present our model of asymmetric information have a common reservation price for the low-quality
in ?3 proceeds >
about product quality. The analysis PL 0. However, their reservation
product, price
by analyzing the separating equilibrium for the case for a high-quality product is distributed uniformly3
of costless quality followed by an analysis of the between PL and PL + V. Thus, a higher V implies
case with Section 4 discusses the impli greater heterogeneity in reservation prices for the
costly quality.
cations of the results and considers various exten high-quality product. There are two consumer seg
sions of the model. Section 5 concludes the paper. All ments, which we call innovators and followers, with
ratio of innovators to followers
proofs are provided in a technical appendix available the being denoted
at http://mansci.pubs.informs.org/ecompanion.html. X > 0. Innovators can ascertain the quality of
by X,
the product before purchase, while followers cannot.
The followers' prior beliefs are that the quality of the
2. Model new product is high with probability r.
Our modeling framework is similar to Bagwell and
Innovators enter the market soon after the new
Riordan (1991). We consider a seller who introduces
product is introduced while the followers enter later
in the period. Thus, we have two stages after the
2
In the case of fashion products, quality could also be interpreted as
with innovators in
product's introduction, entering
"fashionability" in order to apply our model. Under this interpre
tation, the informed consumers in our model represent trendsetters
3
who are informed about fashion, while the uninformed consumers Our results to the case of reserva
generalize homogeneous
represent "trend-followers." We thank the associate editor for sug tion price for the high-quality product. We thank an anonymous
this reviewer on this point.
gesting interpretation.
Stock and Balachander: A Signaling Explanation ofMarketers' Scarcity Strategy
1184 Management Science 51(8), pp. 1181-1192, ?2005 INFORMS
the first stage and followers in the second. available can be discerned a visit to the retail out
entering by
The difference in product knowledge and timing of let, however, and will represent the residual quantity
purchase between innovators and followers in our after sales to innovators.7 In many stores, particularly
model is consistent with the large literature inmarket of the discount variety, all available quantity of the
of innovation are out on the shelves or for
ing about the diffusion (Rogers 1964). product put display
This literature suggests that consumers differ in their consumers to see, leaving little, if any, in the back
timing of product adoption and that early adopters room. Followers infer a by comparing the quantity
are able to understand and evaluate new products available at the retail outlet to the number of fol
more rapidly. (Peter and Olson 1994).4 lowers willing to buy assuming beliefs along the
If a < 1, some followers who are
equilibrium path.8
2.2. The Game to buy the product will not be able to pur
willing
In the beginning of the period, the seller observes the chase it. If there is scarcity of the product, we assume
of the and decides to set a price P and that every purchasing follower has an equal prob
quality product
quantity Q. We assume that production takes place
ability of buying the product, independent of his
only at the beginning of the period, and that the dura or her reservation The in which follow
price.9 way
tion of the first stage (when innovators buy) is short, ers observe a in our model is not quite unlike the
precluding price changes between stages.5 Consumers manner in which buyers of Playstation 2 consoles
are assumed to purchase the product if the expected observed the extent
of scarcity during its introduction.
surplus is positive, given their beliefs about the prod Thus, would-be-buyers often lined up at a store before
uct quality, and if the product is available. Given that time for a Playstation 2 console deliv
opening hoping
innovators if some of them are not as few as five or
purchase early, ery (World Reporter 2000). Often,
served due to inadequate production, none of the fol six consoles may come in and would be snapped up
lowers who comes to the market later is served. The in minutes while some consumers would be left dis
case where none of the followers is served is not very (National Post 2000). Thus, these
appointed potential
Thus, we focus on the interesting case knew how many consoles had arrived, and
interesting. buyers
where at least some followers are served. In this case, how many were in line to be able to calcu
people
the (uninformed) followers update their beliefs about late a. In contrast to such consumers, there were other
the product's based on its price, P, and avail more informed consumers (similar to innovators in
quality
ability, a, defined
as the probability of serving a fol our model) who had seen a prototype of the Playsta
lower who is willing to buy the product. Denote by tion 2 at a trade show the previous year, and had put
b = b(P, a) the followers' posterior belief that quality their name on a waiting list and paid for the console
is high when the price is P and the availability is a. before the scheduled launch date (The Washington Post
Consistent with the anecdotal evidence, we assume 2000). These consumers were able to take home the
that followers are aware if a product is scarce. console on the first day it became available.
More specifically, we assume that followers observe Equilibrium requires that the quantity Q offered
the probability a with which those followers who the seller be consistent with a, given the price P
by
are willing to buy the product will be served. We and beliefs b(P, a). Thus, for expositional purposes,
assume we will Q of the
the following stylized process of how follow translate the quantity decision
ers observe a, a e (0, l].6 As followers enter the mar seller to an equivalent fraction a of those follow
ket in the second stage, they observe the quantity ers willing to buy at price P, given their posterior
available, which is distinct from the quan beliefs. Henceforth, we will refer to quantity deci
production
tity Q, as the latter may include planned sales to inno sions as decisions on a, the one-to-one
recognizing
vators. We assume that consumers do not observe Q, correspondence between Q and a for a given price
which is reasonable as production is often central and posterior beliefs.10 The seller maximizes profit by
ized and removed from the consumer. The quantity
7
As in Bagwell and Riordan (1991), we assume that the uninformed
4 followers do not observe sales to the informed innovators.
We consider the innovators in our model to be informed early
8
not to be confused with the more meaning given Note that if the (P, a) using the a calculated in this fashion is off
adopters, specific
to the term "innovators" in Rogers (1964). the equilibrium path, the actual beliefs will be different and will be
5
more on in ?4.2. given by b{P,a). We could alternately obtain all our results based
We comment this assumption
on P and "quantity available" as the signals instead of P and a.
6
DeGraba (1995) also assumes that the probability of availability
However, the concept of a is more intuitive.
is perceived consumers. we could model
accurately by Alternately, 9
a model, Our results are not sensitive to this assumption. Alternate
as an observed delay in serving followers. In such
scarcity
a will on from followers due to rationing assumptions will only affect the consumer surplus with
represent the time discount profits
out changing our main results.
the amount of delay. a model
Such is mathematically identical to
10
the model discussed in this paper, to the conclusion that It is important to note that the one-to-one be
leading correspondence
delay in serving followers can signal quality. tween Q and a applies only to the seller and not to followers.
Stock and Balachander: A Signaling Explanation ofMarketers' Scarcity Strategy '
Management Science 51(8), pp. 1181-1192, ?2005 INFORMS 1185
Figure 1 MimickingCondition (X1< X2) The parameters for such cheap separation are given
* v~,^i;
?,"1/ x by the following proposition.
distortion signals quality to consumers is that it indi intermediate values of X when it did not exist with
cates that innovators are buying the product. A low the use of price signaling alone.
quality seller, who does not sell to innovators, loses so Scarcity strategies employed by makers of designer
much profit from mimicking the distorted price that wear, as in the case of the Prada boots mentioned
he prefers to reveal himself by charging PL. in ?1, may be an example of signaling with cost
The more result in Proposition 2 is that less quality. In designer wear there is likely to be
interesting
cannot be achieved little difference in cost of material or labor between
separation through price signaling
values of X under some con "hot" styles and the less popular a given
alone for intermediate styles from
ditions. The intuition is that for intermediate X, the designer. On the other hand, quality may repre
seller to serve innovators alone sent wearing something that is appreciated by oth
high-quality prefers
at the full-information price causing nonexistence of ers, or "fashionability," as noted in the introduction
the separating equilibrium. While the price distor (Footnote 2).12
tion needed to separate at low X is high, the high Another signal considered by the literature is unin
seller does not want to deviate and sell to formative advertising, which has been shown to be a
quality
innovators alone because there are too few of them. signal of quality (Milgrom and Roberts 1986). Unin
On the other hand, when X is high, the price dis formative advertising has no effect on demand, but
tortion needed to separate reduces, causing the high appears in the seller's profit function as a fixed cost.
seller to to innova Let A denote the amount of uninformative advertis
quality prefer separation serving
tors alone. For intermediate X, the price distortion ing per consumer expended by the seller. This per
hurts profits from innovators so much that the high capita normalization of advertising costs is without
seller to deviate from his loss of generality. Let A(H) and A(L) denote the equi
quality prefers equilibrium
strategy causing nonexistence. The other condition librium uninformative advertising expended by the
needed for a seller's inability to signal through price high- and low-quality seller, respectively. The follow
is that the marginal benefit of a low-quality ing proposition addresses the question of whether
product
is low (PL is small relative to V). Intuitively, such uninformative can be a better signal than
advertising
conditions favor mimicking and increase the price product scarcity.
distortion needed to separate. We now analyze the Proposition 4. Assume0 < X < X* and the possibil
implications of the sellers' strategy space
expanding ity of signaling through price and uninformative advertis
to include product scarcity, leading to the following In the which
ing. separating equilibrium, always exists,
proposition.
Proposition 0 < X < X* and the possibil
3. Assume P(H)= P?= (V+ pt)/2;
ity of signaling through both price and scarcity. ? In the ^(H)=(PL4yf1+^LVX;
PH = = PL; =
separating equilibrium, which always exists, P(H) P(L) A(L) 0.
=
(V + PL)/2;a(H) amiD. The high-quality seller's equilibrium is the same as
profit
Thus, when signaling through both price and in Proposition 3.
scarcity is permitted, the high-quality seller makes
Thus, uninformative advertising can also signal
the product scarce, but charges the complete infor
and in a to
quality works similar way scarcity in that
mation price. Because price is not distorted from the
the high-quality seller charges the full information
full-information price to signal quality, the signaling
cost is borne by product price when using uninformative advertising. More
scarcity. This suggests that
over, the high-quality seller makes the same profit as
scarcity is a more efficient signaling tool in compari
son to price. Although the high-quality seller loses the
he would by using scarcity as a signal, suggesting
both signals are equally efficient. The reason is that
same amount per consumer as the low-quality seller
uninformative advertising, like scarcity, also allows
by distorting price or making the product scarce,
greater profit to be extracted from innovators in com
scarcity affects followers while not affecting innova
to as a as we
and fol parison using price signal. However,
tors, whereas price affects both innovators will show later, when the cost of a
lowers equally. Moreover, distortion in the price to marginal high
quality exceeds that of the low-quality product even
innovators does not make mimicking any less attrac the amount, uninformative
tive to the low-quality seller because he does not sell by slightest advertising
will not be used, while scarcity may be used. Thus,
to innovators. Thus, the seller lets product scarcity
scarcity is a more efficient signal than uninforma
do the signaling as it is the more efficient signaling tive advertising, in general. Another signal of quality
tool. Scarcity now indicates to followers that innova
tors are buying the product, which must therefore be 12
Perhaps another motivation for offering limited quantities in the
of high quality. The efficacy of scarcity in allowing case of designer wear is the need for consumers to wear unique
profits from innovators to be maximized may explain items (see Pesendorfer 1995). This is an interesting area for further
that has been analyzed in the literature is warranty reason for considering costly quality is that the litera
(Lutz 1989, Balachander 2001), but the aspects of qual ture shows that signaling of quality a
through higher
ity signaled by warranty are reliability and durabil price is effective under these conditions
particularly
ity, which are quite different from the performance (cf. Bagwell and Riordan 1991, Moorthy and Srini
aspect of quality that is relevant for our examples. vasan 1995). Given that we found scarcity to be a
A money-back guarantee may also be a signal of qual more efficient
signaling tool than price when quality
ity (Moorthy and Srinivasan 1995). Because a money is costless, it is interesting to know if scarcity is used
back guarantee usually applies for a short duration, in the case of costly quality, when price becomes a
it is best used to signal quality attributes that are more effective
signal.
revealed after purchase, such as style or fit
quickly Proposition 6. With costly quality, a separating equi
and finish rather than performance attributes. The lat
librium always exists, with P(L) = PL, a(L) = 1, and
ter attributes seem more relevant for the examples
discussed in this paper. Money-back also PL(1+ X)y
P(H)= P*
guarantees
suffer from moral hazard issues and seller and buyer a(H)=
transaction costs that may make it inefficient as a sig
nal of quality. ifO<c<c** andO<X<X*;13
=
We now make some remarks about the pooling P(H) P(1), a(H) = l
equilibrium in this model. The following proposition
shows that for parameters that support a costly sepa ifc**<c<c*andO<X<X*;
= PH =
rating equilibrium (0 < X < X*), there can be no pool P(H) (V+ PL+ c)/2, a(H) = 1
ing equilibrium when consumers' prior beliefs about
are sufficiently Under ifc>c*andO<X<X*orifX> X*;
product quality pessimistic.
these conditions, a seller prefers to reveal where
low-quality
his type. If a pooling equilibrium does exist, the equi
librium price is the full-information price while prod c*= y(P^ + y)2-4P^V(l + X); X*=v ;
uct availability can be anywhere on a continuum. 4pLy;
However, the minimum availability of the product 2PLVX(l+X)v/(PL + V7)2-4PLVr(l+X)
exceeds that in the separating equilibrium. WTiile a + Vy(PL + V)2-4PLV(l+X)
V2+PL(PL+2VX2)-(PL
continuum of pooling equilibria is thus supported, In Proposition 6, application of the intuitive cri
one argue that (PH, 1) is the focal equilibrium
might terion isolates the separating of the
as both seller types enjoy a higher profit than in the strategy high
quality manufacturer to a single point on the bold line
other equilibria. This suggests that the case for a pool
segment of the mimicking parabola depicted in Fig
ing equilibrium with scarcity is not very compelling.
ure 1. Figure 2 shows how this point on the
The results are similar for the costly quality case. depends
parameters X and c. In the scarcity strategy region,
Proposition 5. No-pooling the c not too the seller uses
equilibrium satisfying with high and X moderate,
intuitive criterion exists if X > X* or when 0 < X < X*
scarcity (and price) to signal quality. Such an equilib
and ? T?
V2
- rium would represent a point somewhere between O
r <r = (PL)2 and S on the bold line segment in Figure 1. As the
2V2-2PLV-4PLVX' cost of quality increases, the scarcity strategy region
a = =
If pooling equilibrium exists, P(H) P(L) PH, and becomes smaller, that scarcity becomes
implying
a less efficient device. Wfhen the cost of
4PLVr(l + X) signaling
a(H) = ,1 exceeds c**, the seller use a high
a(L),L(y + pL)[y(2r_i) + pL] quality may only
price to signal quality, so that we have pure price
a(H) and a(L) are bounded below by amin.
signaling (point O in Figure 1). If the cost of qual
ity exceeds a threshold c*, or if the ratio of
3.2. Costly Quality higher
innovators becomes sufficiently high, the seller sep
So far we have considered higher quality to be cost
arates cheaply by charging just the full-information
less to the seller. WTiile this assumption may be
for some for price. Note that unlike Bagwell and Riordan (1991),
appropriate products, higher quality
who find that a separating equilibrium with price sig
many products often entails higher marginal costs
fail to exist when c is small, a
due to more expensive materials, greater precision, naling might separating
etc. Thus, we consider the signaling problem when
is we assume that a high
13p'=
quality costly. Specifically, ?{<x+pLx+vx+
has a cost of c> 0, with the mlltlZ* +W+B+Q??}
quality product marginal A = ?V?VcVP?WVT+XjB + 3cPLV(9+ 11X);
cost of the product being zero.
marginal low-quality
The relationship between cost and quality is common C = 6cPLV(9+ lOX);
knowledge between the seller and consumer. Another B = c3X+ 3c2(PL+ V)X + (PL+ V)3X + 3c((PL)2X+ V2X).
Stock and Balachander: A Signaling Explanation ofMarketers' Scarcity Strategy
Management Science 51(8), pp. 1181-1192, ?2005 INFORMS 1189
equilibrium always exists in our model. We can infer price and scarcity signaling to pure price signaling when c
that price signaling has less separating ability when increases beyond c**.
c is small (more below). However, the possibility of (ii) There is a cost threshold c > 0 above which
makes efficient =
signaling through product scarcity sig a(H) lforallX.
naling possible even when price signaling is not as (iii) When c < c, there_exists X and X such that for
efficient. all X satisfying X < X < X, a(H) < 1.
The intuition for the separating ability of price is The following proposition presents the effect of PL
similar to the case of costless quality except that price
and V on the the high-quality seller's strategy in the
signaling is now more efficient. This increased effi
separating equilibrium. An increase in y or a decrease
ciency comes about because with a cost (and
higher in PL makes mimicking more attractive, necessitat
thus a lower margin), the high-quality seller now
loses less than the low-quality seller when the quan ing the use of both scarcity and price to separate
Proposition 7. (i) c** < c* when X < X*. Thus, when 4- a(H) + -for low X
+ for highX
separation is costly, the equilibrium switches from mixed
Stock and Balachander: A Signaling Explanation ofMarketers' Scarcity Strategy
1190 Management Science 51(8), pp. 1181-1192, ?2005 INFORMS
Table 3 Separating Equilibrium:High-QualitySeller's Signaling was Sony's first entry into the video game market, it
Strategy is likely that there were few consumers who could
Value of X evaluate the quality of this product. However, when
the next-generation was launched?the Sony
c LowX X product
Valueof Intermediate HighX II?there were a few expert
Playstation likely quite
=0
cScarcity or Scarcity or Cheap separation users who could evaluate this product. Thus, prod
uninformative ad. uninformative ad. uct scarcity was observed the launch of this
during
PriceLow
c Scarcity and price Cheap separation consistent with our model.
Intermediate c Price Price Cheap separation
product,
With the passage of time, one should expect the
High c Cheap separation Cheap separation Cheap separation
number of informed consumers to increase through
In the case of costless we determined that mechanisms like word of mouth. Thus, if our model
quality
uninformative is as efficient as product were extended to include a future period in which a
advertising
scarcity in signaling quality. When quality is costly, new cohort of consumers enter the market, we could
however, this result no longer holds, as the following expect a higher ratio of informed consumers (inno
proposition shows. In particular, when scarcity can vators), X, in this later cohort. At this higher value
be used for signaling, uninformative advertising will of X, it may become optimal to signal through price
never be used in the separating equilibrium. Recall alone or signaling may become cheap, as seen above.
that costly quality increases the signaling efficiency of The implication is that a marketer is unlikely to con
scarcity as loss of sales from followers due to scarcity tinue the scarcity strategy as a signaling device beyond
is more costly for the mimicking low-quality seller. the introductory period.15 Casual empirical evidence
However, there is no change in the signaling effi seems to be consistent with this prediction of the
ciency of uninformative advertising because it is inde model.
of the cost of quality. Turning now to the effect of the cost of quality c
pendent
on the signaling strategy, the piano market may be
Proposition 9. A separating equilibrium with unin an of high cost of quality because
does not exist when quality is costly. example qual
formative advertising cost significantly more to produce. The
ity pianos
Table 3 summarizes the results of our analysis. use high-quality and exotic
highest-quality pianos
woods and are handcrafted (Steinway & Sons: Buying
4. Discussion a (A), HBS Case). Our analytical results sug
Legend
gest that piano manufacturers should signal quality
4.1. Implications to be consistent
through price alone, and this appears
The signaling explanation of scarcity strategies helps with casual observation.
us to understand why
a seller whose product is scarce show that an in
The comparative statics results
will not charge a
higher market-clearing price or crease of V in relation to PL favors the use of scarcity
increase quantity to eliminate scarcity. Our analysis can be interpreted as sit
strategies. These conditions
implies that for parameters under which scarcity is uations where the marginal benefit of a high-quality
optimal, a higher market-clearing price (a price level In other words,
product is high. quality improve
that eliminates the excess demand) can be mimicked are consumers in
ments very relevant to such situa
a seller and thus will not be a credible
by low-quality tions or product categories. Our results suggest that
of Likewise, an increase of quantity that a seller is more a scarcity strategy
signal quality. likely to employ
will eliminate the scarcity will not credibly convince in such a situation. Thus, product that are
categories
uninformed consumers that the seller is a high-quality to be are to be
perceived "commodity-like" unlikely
type. candidates for scarcity strategies because con
good
The effect of X on the equilibrium signaling strat sumers are quite content with the available quality.
of the seller that new
egy high-quality suggests Products that are consumed in public, such as cars
to-the-world are unlikely candidates for or video a video
products games (the consumer may play
because there are likely few expert a are more to cases
scarcity strategies game with friend) likely be
users who will be able to evaluate such products. are relevant to
where quality improvements very
Thus, X is likely to be small in such cases, favoring consumers. Our model that strate
predicts scarcity
the use of pure price signaling.14 Anecdotal evidence more
gies are likely to be used for such products.
in the case of Sony Playstation I seems to be consistent An alternate of V is that it captures
interpretation
with the above prediction as there is little evidence in valuation
the heterogeneity of high quality. We
of scarcity at the time of introduction of this product. that valuation of high quality is more
may expect
Since the Sony Playstation Iwas quite different from
the then-popular Nintendo video game system and 15
Moreover, in the later stages of the product life cycle, there may
be no uncertainty about quality anymore, and thus there may be
14 no
We are to the results for costly in this case. signaling problem.
referring quality
Stock and Balachander: A Signaling Explanation ofMarketers' Scarcity Strategy
Management Science 51(8), pp. 1181-1192, ?2005 INFORMS 1191
homogeneous for basic necessities (staple goods) between stages is important for our results because
consistent with Maslow's hierarchy of needs. How the efficiency of scarcity as a signal relies on its abil
ever, valuations for discretionary products (specialty ity to reduce price distortion to innovators. While
are more is satisfied if price changes can be
goods) likely to be heterogeneous (high this assumption
V) because these products needs. made only infrequently, an alternate justification of
satisfy higher-level
Thus, our results can be interpreted as suggesting that this assumption is that the firm cannot discriminate
scarcity strategies are more likely to be used for dis between innovators and followers based on the tim
rather than for basic necessities, ing of market In this context, a more realis
cretionary products entry.16
consistent with casual observation. This may explain tic assumption, perhaps, is that firms can imperfectly
we do not see discriminate between the two segments based on the
why scarcity strategies being employed
for staple products like milk, chips, or orange juice. timing of market entry, thus allowing price changes
data from the U.S. car market, we tested the between stages. However, due to the firm's imper
Using
a is more fect ability to discriminate on this dimension, we may
implication that scarcity strategy likely to
be used for discretionary such as sports and have some innovators buying in the second stage.
products
Then the second-stage becomes a microcosm
luxury cars rather than for other cars offering basic problem
Data was collected for the 1997-2002 of the model analyzed in this paper, as long as inno
transportation.
which time 62 new car models were vators in this second stage generally buy before the
period, during
introduced. We exclude new versions of existing mod followers so that scarcity disproportionately affects
els from our definition of new car models. Models followers. The latter assumption allows scarcity sig
that were scarce during the first year of introduction naling to be efficient so that the results of this paper
were identified from press reports using the FACTIVA go through for this second stage.17 Thus, our assump
database. Based on classification provided by Ward's
tion that price cannot be changed between stages can
Automotive Yearbook, the new models were classi be justified by the fairly weak assumption that the
fied into two categories: car and non seller can only imperfectly discriminate between inno
luxury/sports
vators and followers based on the timing of market
luxury cars. In the luxury/sports car category, 17 out
of 31 new models (54.83%) were scarce during intro entry.
duction. In contrast, 6 out of 31 new models We have assumed that demand is deterministic for
(19.35%)
sellers of either quality. Notably our results show that
in the nonluxury category were scarce. The difference
in proportion of scarce models is statistically even if demand is deterministic, a seller may create
signifi
cant (p < 0.01). Thus, the implications of our model scarcity to credibly signal his quality. If demand were
are consistent with the data. to be stochastic due to random shocks, scarcity may
occur even for low-quality Consumers will
products.
4.2. Model Assumptions and Extensions then face a more complex problem in inferring the
The conclusions derived in the previous sections quality of the seller. However, we expect the intuition
appear to be robust to relaxation of some model for the deterministic model to carry over leading to
assumptions. we assume that innovators higher levels of scarcity being observed with greater
Although
purchase before followers do, signaling through prod probability for the high-quality product. Our model
uct scarcity will continue to be optimal under some can also be easily extended to incorporate word-of
conditions, as long as a sufficient number of inno mouth effects through an increase in X, because more
vators purchase earlier than followers. The earlier consumers will become informed due to such effects.
purchase by the innovators reduces potential losses While we do not assume demand or network exter
from innovators due to product and makes nalities, unlike Becker (1991), our results can also be
scarcity
as that can the
scarcity signaling relatively more efficient. Another interpreted implying scarcity signal
in our model is that followers who size of the future installed base of consumers, because
assumption
do not find the product available in the introduc it indicates that innovators are buying the product (cf.
are not served. This assumption can be Padmanabhan et al. 1997).
tory period
relaxed to allow rationed followers to be served in
a future with the from 5. Conclusion
period (backordering) profits
these rationed followers appropriately discounted. In this paper, we rationalize a seller's use of
scarcity
This should the loss incurred in not as a way of to unin
only change strategies signaling his quality
serving a follower without changing our formed consumers. In doing so, our analysis
significantly helps
results because it maintains the underlying intuition to resolve some of the puzzling issues raised by the
that sacrificing profit from followers helps increase practice of scarcity strategies (see ?1). The observa
profit from innovators in the separating equilibrium.
16
Thus, unlike DeGraba (1995), our results do not We thank an anonymous reviewer for this suggestion.
on the product in future 17
depend being unavailable If some followers buy in the first stage, but after the innovators,
periods. The assumption that price cannot be changed
we will have similar results for the first stage.
Stock and Balachander: A Signaling Explanation ofMarketers' Scarcity Strategy
1192 Management Science 51(8), pp. 1181-1192, ?2005 INFORMS
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