Scarcity Strategies Under Quasi-Bayesian Social Learning

This paper proposes a theory of firm-induced scarcity in the early stages of a new product’s selling season. By restricting supply, the firm induces self-selection of customers who are likely to generate the most positive product reviews; this can be advantageous for the firm if, as suggested by existing empirical evidence, subsequent consumers do not appropriately account for the selection bias in the early review sample. We develop a novel model of quasi-Bayesian social learning that allows us to test the implications of this theory. Our analysis yields three main insights. First, the described rationale constitutes a profitable strategy for the firm only in settings characterized by price rigidity and only if the product’s quality is not too high with respect to prior market expectations; for such cases, we provide guidelines on optimal pricing and quantity decisions. Second, although induced scarcity represents an effort by the firm to manipulate the social learning process, this may result not only in an increase in the firm’s profit, but also in the consumers’ surplus. Third, product scarcity may act as an effective substitute for dynamic pricing, allowing the firm to approximate dynamic-pricing outcomes while charging a fixed price.