Pricing and Strategic Rationing When Selling to Snobbish Consumers

This paper develops an analytical model to study the impact of snobbish (exclusivity-seeking) consumer behavior on a firm’s price and quantity decisions. We consider a profit-maximizing monopoly firm selling a product over two periods to two segments of consumers (with high and low valuation of the product), who are forward-looking and snobbish, i.e., their valuation of the product decreases as more people in the population consume it. This modeling framework enables us to explain the heterogeneity in pricing of snob appeal products observed in practice. Specifically, we find that markdown pricing is optimal when the fraction of high-value consumers is small whereas uniform pricing is optimal when this fraction is large. Thus, snobbish consumer behavior provides another motivation for markdown pricing in addition to aggregate demand uncertainty, heterogeneity in consumer waiting costs, risk-aversion and valuation uncertainty that have been discussed in the literature. The underlying driver for this results is that when selling to snobbish consumers, intertemporal price discrimination increases product exclusivity and hence consumers’ willingness to pay, in addition to the usual effect of attracting consumers with different valuations. Similar to normal products, we find that advance purchase discounts are optimal only when consumers do not know their true valuations in the first period. However, we show that snobbish consumer behavior coupled with uncertain valuations may lead to discounts in advance. We use our modeling framework to formally distinguish between scarcity and exclusivity, where the former is defined with respect to the demand whereas the latter is defined with respect to the entire population. We find that snobbish consumer behavior leads to scarcity, but not necessarily to exclusivity, i.e., the product may be exclusive even when consumers are not snobbish. Finally, contrary to intuition, we find that the product may become more exclusive when the price is marked down and hence price markdowns need not always be associated with excess inventory when selling to snobbish consumers.