The Making of a “Hot Product”: A Signaling Explanation of Marketers’ Scarcity Strategy

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.

Selling to Conspicuous Consumers: Pricing, Production, and Sourcing Decisions

“…Our paper takes a different approach. Just as scarcity may be a signal of product quality (Stock and Balachander 2005), we show how scarcity may, in markets with uncertain demand, also be used to influence demand and consumer valuations, especially when some consumers' decisions are affected by the desire for exclusivity.…”

“…Recent research on shortages of goods as a marketing strategy is also relevant to our paper. Stock and Balachander (2005) provide a signaling strategy to explain product shortages in order to sell 'hot' products in a market with quality uncertainty. Balachander and Stock (2009) provide strategic directions on when to offer "limited products" as a part of the product line.…”

“…• While it has been shown that scarcity can be a strategy to signal quality (Stock and Balachander 2005), it is unclear if scarcity can lead to improved profits when there is no quality uncertainty in the market. Scarcity necessarily implies a reduction in product availability, and therefore a reduction in unit sales.…”

Reference Groups and Product Line Decisions: An Experimental Investigation of Limited Editions and Product Proliferation

“…According to this literature, consumers prefer products that are available in smaller quantities (e.g., Worchel et al 1975). One explanation for this finding is that consumers may believe that scarce products are of better quality (see Stock and Balachander 2005 for a signaling explanation for scarcity). In our model, because quality is known, there is no need to signal quality.…”

Feasting on Leftovers: Strategic Use of Shortages in Price Competition Among Differentiated Products

“…Therefore, the monopolist can be better off setting a low price even if it induces shortages. Other papers in the literature study motivations such as building customer loyalty and signaling product quality (see Haddock andMcChesney 1994 andStock andBalachander 2005, respectively). Our model opens the competition dimension and points out a different incentive, namely the strategic use of shortages to keep a competitor in check.…”