Dynamic production and pricing decisions in the presence of the snob effect

Abstract

AbstractThis study analyzes the production and pricing strategy of a monopoly firm in the presence of the snob effect, whereby consumers value a product more when its availability is lower. Real‐world firms often intentionally cause the snob effect by strategically reducing supply quantities or even causing shortages. This observation suggests the existence of a trade‐off between utilizing the snob effect and avoiding opportunity costs. We consider a general multiperiod model in which a monopoly firm determines the dynamic paths of price and sales quantity; although consumers are not forward looking, they evaluate past stockouts with a discount factor. We find that the optimal dynamic paths of the price and output level vary depending on the degree of consumer sensitivity to stockouts, the consumer's discount factor on past shortage, and the firm's discount factor on future profit. Nevertheless, the total profit monotonically increases with the degree of consumer sensitivity to stockouts.