The effects of product scarcity on quality image

Axel Stock, Purdue University

Abstract

In this research we explain how companies can benefit from making products hard to get for consumers. Firstly, we develop a signaling model to show that under certain conditions it is optimal for companies to make a product scarce in order to signal its quality to uninformed consumers. In our model a scarcity strategy is favored by low cost of quality, greater heterogeneity of reservation prices for a high quality product, a low reservation price for a low quality product and a moderate number of informed consumers. Thus, the implications of our model are consistent with observations in industry practice such that product scarcity can usually be observed for specialty products or during the introduction stage of the product life cycle. Examples for products that were marketed with product scarcity are Sony's Playstation 2, Mazda Miata, Volkswagen Beetle and various items in the designer fashion industry. Secondly, we test the major implication of our analytical model, i.e. that product scarcity can signal high quality and shape customer preferences, empirically with data from the U.S. car market. Employing an estimation framework in the tradition of the New Empirical Industrial Organization (NEIO) and utilizing aggregate sales data as well as data on product characteristics we show that product scarcity increases customers' preferences for a particular car model. Product scarcity in our approach is determined in two ways: with inventory data measured in days supply and from press reports acquired from the FACTIVA database. In the estimation of car demand we consider endogeneity of prices and customer heterogeneity to avoid biased estimates of the coefficients.

Degree

Ph.D.

Advisors

Balachander, Purdue University.

Subject Area

Marketing

COinS