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.
Many brands today introduce limited edition (LE) products as part of their product line. However, little is known about the conditions under which a brand should introduce an LE product or the competitive implications of doing so. We investigate this issue using a game theoretic model of a market where two brands compete for consumers who desire exclusivity. Our analysis shows that adding an LE product has a positive direct effect on brand profits through the increased willingness of consumers to pay for such a product, but also has a negative strategic effect by increasing price competition between brands. These effects result in different conclusions depending on the nature of brand differentiation. When brands differ in quality, we show that only the high-quality brand may gain in comparison to a scenario where there are no LE products. Although a low-quality brand may offer an LE product as a defensive strategy, its profits are lower than would be in a world without LE products because of the negative strategic effect. When we consider brands that are differentiated on a horizontal attribute such as taste, we find that the negative strategic effects cause lower equilibrium profits if both brands introduce LE products. Yet brands cannot avoid introducing LE products because they face a .game theory, marketing strategy, product management, pricing research, limited edition products
Recent product introductions such as the Xbox 360, Sony Playstation 2, and PT Cruiser have been characterized by shortage of these products. Some experts have suggested that such scarcity can be a deliberate strategy for making the product more desirable. In this paper, we empirically examine the relationship between introductory inventory levels and consumer preference in the U.S. automobile industry and show that relative scarcity of a car at the time of introduction is associated with higher consumer preference for the product. Furthermore, we perform an empirical test of alternative theories about the rationale for introductory product scarcity. Specifically, we consider two theories of supplier-induced scarcity, namely the buying frenzy theory and the signaling theory, and an alternative theory that suggests that demand uncertainty causes introductory product scarcity. We find more support for the signaling theory of supplier-induced scarcity than the buying frenzy theory or the demand uncertainty theory in our analysis of the automobile market.marketing, new products, competitive strategy, signaling, econometrics, aggregate logit models, economic theory testing
Price promotions and bundling have been two of the most widely used marketing tools in industry practice. Past literature has assumed that firms respond to price promotions by promoting a product in the same category. In this paper, we extend this literature as well as the bundling literature by considering the possibility that a firm may respond to a competitor's price promotions by also offering a cross-buying or bundling discount. Using a game-theoretic model, we show that bundle discounts can help increase profits in a competitive market by creating endogenous loyalty, thereby reducing the intensity of promotional competition. We also find that bundle discounts can be used as an effective defensive marketing tool to prevent customer defection to the competition.bundling, competitive marketing strategy, game theory, price promotions, brand loyalty
With increasing fragmentation of media markets and recent advances in technology, loss of advertising effectiveness has been a great concern for marketers. For consumers, the digital video recorder (DVR) offers the possibility to fast-forward through live programming. Whereas the DVR thus benefits consumers by reducing nuisance from commercials, industry observers believe that it may diminish advertisers' profits by rendering commercials ineffective. We use a model of informative advertising to study the effect of DVR penetration on competing advertisers' strategies and profits. We find that the overall effect of DVRs depends on the trade off between loss of advertising effectiveness and reduction in competition between firms. The latter effect arises because DVR penetration may increase the ratio of partially informed to fully informed consumers. We identify conditions under which an increase in DVR penetration counterintuitively leads firms to increase advertising levels and enjoy higher profits. Interestingly, we find that greater DVR penetration is beneficial for firms when the share of DVR owners in the population is above--rather than below--a threshold level. We also study the impact of different fast-forwarding ("zipping") behaviors on product market competition.advertising, game theory, competitive analysis, marketing strategy, advertising avoidance technologies
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