Operations strategies with snobbish and strategic consumers

Studying the optimal production and pricing strategies of a luxury brand manufacturer (in this paper, the “manufacturer” is in fact also the “retailer”), we consider the following situation. First, consumers exhibit a prestige-seeking (snobbish) behavior that values product exclusivity. Their utility decreases as more consumers possess the product. Second, consumers show a forward-looking (strategic) behavior. They make shop visit decisions based on predicted product availability. Third, the manufacturer's production policy is unobservable to consumers. Given these basic premises, we consider a traditional newsvendor inventory system and analytically derive the equilibrium production and pricing strategies within the rational expectation framework. We then propose two improvement strategies, each using a well-established channel policy, to steer the game participants to reach a better equilibrium than the one for the traditional system. First, under the limited edition strategy with consumer returns, the firm uses the consumer return policy as a proxy for the limited edition strategy that aims to increase product exclusivity. Second, under the product line extension strategy, the firm applies product line extension as a means to guide the game participants to simultaneously increase product availability and product exclusivity. Finally, we extend the study by incorporating a variety of modeling variations and examine robustness of the research findings.