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

  • Authors:

  • Necati Tereyağoğlu;Senthil Veeraraghavan

  • Affiliations:

  • College of Management, Georgia Institute of Technology, Atlanta, Georgia 30308;The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104

  • Venue:
  • Management Science
  • Year:
  • 2012

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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. This paper was accepted by Preyas Desai and Pradeep Chintagunta, marketing.