Operations, Information and Decisions Papers

Document Type

Journal Article

Date of this Version

12-2012

Publication Source

Management Sciecne

Volume

58

Issue

12

Start Page

2168

Last Page

2189

DOI

10.1287/mnsc.1120.1545

Abstract

Consumers often purchase goods that are “hard to find” to conspicuously display their exclusivity and social status. Firms that produce such conspicuously consumed goods such as designer apparel, fashion goods, jewelry, etc., often face challenges in making optimal pricing and production decisions. Such firms are confronted with precipitous trade-off between high sales volume and high margins, because of the highly uncertain market demand, strategic consumer behavior, and the display of conspicuous consumption. In this paper, we propose a model that addresses pricing and production decisions for a firm, using the rational expectations framework. We show that, in equilibrium, firms may offer high availability of goods despite the presence of conspicuous consumption. We show that scarcity strategies are harder to adopt as demand variability increases, and we provide conditions under which scarcity strategies could be successfully adopted to improve profits. Finally, to credibly commit to scarcity strategy, we show that firms can adopt sourcing strategies, such as sourcing from an expensive production location/supplier or using expensive raw materials.

Keywords

strategic customer behavior, game theory, conspicuous consumption, pricing, scarcity, sourcing

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Date Posted: 27 November 2017

This document has been peer reviewed.