How Precious Are Scarce Products? An Experimental Study on a Turn‐and‐Earn Allocation Mechanism

Abstract

ABSTRACTIn this study, we conduct laboratory experiments to analyze a turn‐and‐earn allocation mechanism by which a single supplier allocates scarce products to two identical retailers. Under this mechanism, the supplier uses past sales to dynamically allocate scarce capacity among downstream retailers. The experimental data show that retailers strategically and systematically order more than predicted by standard theory. We find that the psychological scarcity effect is an important phenomenon. Using cognitive hierarchy theory, we develop a behavioral model to consider the scarcity effect, which causes retailers to place additional value on the allocations in a supply‐shortfall period. Using structural estimation, we show that retailers perceive scarce products as being more precious than the standard theory predicts, and exhibit an average of 2.7 reasoning steps during strategic interactions. Moreover, the retailers exhibit social rejoice preference. They are more likely to make myopic decisions when the degree of scarcity is relatively low. Comparing with the proportional allocation mechanisms by an additional experiment, we find that the turn‐and‐earn mechanism is more beneficial to the supplier but less to the retailers.