Optimal dynamic production and sales plans for a new product in the presence of scarcity effects

Abstract

This paper develops an integrated production and sales planning model for a firm that wants to sell a new product with a fixed market potential under a supply constraint. We consider a situation where a new product diffusion process depends on the word of mouth effects of waiting applicants in addition to adopters and innovators. This allows us to represent scarcity effects and its consequences, hype and retarding effects. Some practitioners argue that firms intentionally delay sales to earn more profits. We identify situations where a strategic sales delay can be optimal. In contrast, under the retarding effect, a build up plan becomes dominant. Moreover, we find that the length of the build-up period is not constant and depends on the magnitude of the retarding effect. Finally, we investigate the capacity implications of scarcity.