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

Abstract

T wo single-product firms with different quality levels and fixed limited capacities engage in sequential price competition in an essentially deterministic model where customers have heterogeneous valuations for both products. We develop conditions under which the leader (she) can take strategic advantage of her limited capacity by pricing relatively low, purposefully creating shortages and leaving some leftovers for the follower (him) to feast on, avoiding direct competition. The extent to which the leader benefits in this Leftovers Equilibrium depends on operational variables such as the capacity levels of the two firms and the sequence in which customers arrive at the market. We spell out the details for three different known arrival sequences within a specific subset of plausible fixed-capacity levels. The follower's strategic shadow price can be positive even when not all his capacity is used, and the leader's can be negative when all her capacity is used. We illustrate that Leftovers Equilibria can arise when some of our assumptions are relaxed.

A two-period pricing model with hunger marketing strategy

“…While few papers use a mathematical model to analyze the effect of hunger marketing strategy (Durango-Cohen and Wagman, 2014; Porteus et al , 2010), most previous literature related to scarcity strategy with a mathematical model is focused on applicability or inventory of scarcity. For example, Stock and Balachander (2005) used a game-theoretic model to investigate scarcity strategies, and they offered a signaling explanation for the optimality of scarcity strategies.…”

Introducing P2P service to a B2C sharing platform: A hybrid sharing mode

“…Based on consumer preference, Porteus et al [40] studied three scenarios: high-to-low customer arrival order (the later customers arrive, the lower their willingness to pay), independent order (customers' arrival times are independent of their willingness to pay), and low-to-high customer arrival order (the later customers arrive, the higher their willingness to pay). They analyzed product differentiation competition and pricing decision problems for leaders and followers in the market.…”

Strategic Obfuscation of Production Capacities

“…For some recent reviews, see [13,39,7,37,38]. Porteus et al [27] study a model with heterogeneous consumers and two capacitated firms producing differentiated products. The firms engage in sequential price competition.…”