Article ID: | iaor20133 |
Volume: | 58 |
Issue: | 12 |
Start Page Number: | 2168 |
End Page Number: | 2189 |
Publication Date: | Dec 2012 |
Journal: | Management Science |
Authors: | Veeraraghavan Senthil, Tereyaolu Necati |
Keywords: | supply & supply chains |
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