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An Empirical Analysis of Scarcity Strategies in the Automobile Industry

  • Subramanian Balachander

    ()

    (Krannert Graduate School of Management, Purdue University, West Lafayette, Indiana 47907)

  • Yan Liu

    ()

    (Krannert Graduate School of Management, Purdue University, West Lafayette, Indiana 47907)

  • Axel Stock

    ()

    (College of Business Administration, University of Central Florida, Orlando, Florida 32816)

Registered author(s):

    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.

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    File URL: http://dx.doi.org/10.1287/mnsc.1090.1056
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 55 (2009)
    Issue (Month): 10 (October)
    Pages: 1623-1637

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    Handle: RePEc:inm:ormnsc:v:55:y:2009:i:10:p:1623-1637
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    1. Newey, Whitney K., 1984. "A method of moments interpretation of sequential estimators," Economics Letters, Elsevier, vol. 14(2-3), pages 201-206.
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    8. Frank M. Bass, 1969. "A New Product Growth for Model Consumer Durables," Management Science, INFORMS, vol. 15(5), pages 215-227, January.
    9. Axel Stock & Subramanian Balachander, 2005. "The Making of a "Hot Product": A Signaling Explanation of Marketers' Scarcity Strategy," Management Science, INFORMS, vol. 51(8), pages 1181-1192, August.
    10. Patrick DeGraba, 1995. "Buying Frenzies and Seller-Induced Excess Demand," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 331-342, Summer.
    11. K. Sudhir, 2001. "Competitive Pricing Behavior in the Auto Market: A Structural Analysis," Marketing Science, INFORMS, vol. 20(1), pages 42-60, January.
    12. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
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