The Making of a "Hot Product": A Signaling Explanation of Marketers' Scarcity Strategy

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.