Startseite Exclusivity as a Signal of Quality in a Market with Word-of-Mouth Communication
Artikel
Lizenziert
Nicht lizenziert Erfordert eine Authentifizierung

Exclusivity as a Signal of Quality in a Market with Word-of-Mouth Communication

  • Minoo Ashoori , Eric Schmidbauer ORCID logo EMAIL logo und Axel Stock
Veröffentlicht/Copyright: 19. August 2020
Review of Marketing Science
Aus der Zeitschrift Review of Marketing Science Band 18 Heft 1

Abstract

In some markets consumers seek exclusive consumption experiences, yet in these markets businesses sometimes market their goods widely and at low prices during an introduction period. We use a two-period game-theoretic model to provide a signaling explanation for this phenomenon. In our model, exclusivity-seeking consumers must infer product quality from its price and level of exclusivity in the initial stage. After purchase consumers communicate the true learned quality through word-of-mouth (WOM) so that the entire market becomes informed, including a group of new consumers whose size depends on the number of introductory purchasers and the strength of WOM. We show that a high-quality seller signals by marketing widely when the desire for exclusivity is intermediate and WOM is strong.

Keywords: exclusivity; word-of-mouth communication; signaling; game theory
Corresponding author: Eric Schmidbauer, Department of Economics, College of Business Administration, University of Central Florida, 4336 Scorpius St., Orlando, FL32816, USA, E-mail:

Acknowledgments

We thank the seminar participants at the Summer AMA conference 2016 in Atlanta, Georgia and at the Marketing Science conference 2016 in Shanghai, China, for comments on an earlier version of this paper. The article is based in part on essay 2 of Minoo Talebi Ashoori’s dissertation at the University of Central Florida. We thank Anna Malaj for research assistance. All errors are our own.

Appendix

Proof of Proposition 1

Since L will induce beliefs b=0 in any separating equilibrium and αL* is the unique maximizer when b=0, L uses αL* in any separating equilibrium. We henceforth restrict attention to H’s choice of α.

Next, it is necessary and sufficient to satisfy MC and PC (given immediately below line (5)) to establish an equilibrium. The shaded region in Figure 4 shows the points satisfying both constraints, which is the feasible set over which we perform the maximization problem from line (5). Both PC and MC bind at points B and C, which can be explicitly solved for by substituting the binding MC p=ΠL−πLα−ωπL into the binding PC and solving the resulting quadratic in α:

(10)p=1+q−kHαΠL−πLα−ωπL=1+q−kHα0=−kHα2+(1+q+ωπL)α−ΠL+πL.
Figure 4: The mimicking (MC) and participation constraints (PC) and their intersection. Both constraints are satisfied in the shaded region. Point A occurs at α=0$\alpha =0$, point B at α−${\alpha }^{-}$, point C at α+${\alpha }^{+}$, and point D at α=1+q$\alpha =1+q$.
Figure 4:

The mimicking (MC) and participation constraints (PC) and their intersection. Both constraints are satisfied in the shaded region. Point A occurs at α=0, point B at α−, point C at α+, and point D at α=1+q.

Solving yields solutions α±≡1+ω4+q±γ2k, where γ≡q2+(2+ω2)q+(1−kH)(1+ω2+ω216). Note when k is sufficiently small α+>1 which lies outside the domain α∈[0, 1], in which case the corner solution α+=1 obtains. We therefore redefine α+≡min{1, 1+ω4+q+γ2k}. An analogous issue does not arise with α− since α−>0 always. Note that even in the case where α+=1 and αH*=1 signaling is still costly since in the former case MC binds and so price is lower than in the latter case.

Mimicking Constraint Non-binding

When the MC is non-binding, full information pricing pH* and exclusivity level αH* given below line (3) achieve separation. This can occur in one of two ways. First, it is possible that PC binds tighter than MC for all α∈[0, 1]. Mathematically, both solutions to line (10) lie outside [0, 1], and in particular 1<α−<α+. In the second case MC and PC do intersect on [0, 1] but MC may still not bind, as for example in panel (a) of Figure 2. These cases correspond to αH*≤α− and αH*≥α+, respectively. A calculation shows

(11)αH*≤α−⇔1+q+ωπH−c2k≤1+q+ω4+γ2k⇔Δ≤−γ

where we use the substitution πL=14. A similar calculation shows that

(12)αH*≥α+⇔Δ≥γ.

Thus full information exclusivity level separates when |Δ|≥γ.

Mimicking Constraint Binding

Now suppose |Δ|<γ. Since we look for an equilibrium where type H earns the highest profits possible subject to the MC and PC, we substitute the binding MC, p=ΠL−πLα−ωπL, into line (5) to get

(13)maxα(ΠL−πL+πH)+αΔ.

The maximand is everywhere decreasing in α if Δ<0 while it is increasing if Δ>0. In the former (latter) case profits are maximized with α as low (high) as possible, which occurs where MC and PC both bind, namely point B (point C) of Figure 4, with corresponding exclusivity level α− (α+). Substituting these α into the PC and simplifying yields the pricing and exclusivity level in the proposition.

Finally, when α±∈[0, 1] price is found by substituting into PC to get 1+q−kα. However, in the boundary case where the calculated α+>1 we are restricted to α+=1, and so MC binds but PC does not. The price charged is thus found by substituting α=1 into MC (line 6): ΠL=p+(1+ω)πL⇔p=ΠL−(1+ω)πL=14−ω8+ω264.

Off the Equilibrium Path (OEP) Deviations and the Intuitive Criterion

In the Online Appendix we show OEP deviations will not occur. Additionally, we show the OEP beliefs we specify uniquely satisfy the intuitive criterion (Cho and Kreps 1987).

Proofs of Corollary 1, Propositions 2, and 3

See the Online Appendix.

References

Amaldoss, W., and S. Jain. 2005a. “Conspicuous Consumption and Sophisticated Thinking.” Management Science 51 (10): 1449–66. https://doi.org/10.1287/mnsc.1050.0399.Suche in Google Scholar

Amaldoss, W., and S. Jain. 2005b. “Pricing of Conspicuous Goods: A Competitive Analysis of Social Effects.” Journal of Marketing Research 42 (1): 30–42. https://doi.org/10.1509/jmkr.42.1.30.56883.Suche in Google Scholar

Bagwell, K., and M. H. Riordan. 1991. “High and Declining Prices Signal Product Quality.” The American Economic Review 224–239.Suche in Google Scholar

Balachander, S., Y. Liu, and A. Stock. 2009. “An Empirical Analysis of Scarcity Strategies in the Automobile Industry.” Management Science 55 (10): 1623–37. https://doi.org/10.1287/mnsc.1090.1056.Suche in Google Scholar

Balachander, S., and A. Stock. 2009. “Limited Edition Products: When and when Not to Offer Them.” Marketing Science 28 (2): 336–55. https://doi.org/10.1287/mksc.1080.0401.Suche in Google Scholar

Cho, I.-K., and D. M. Kreps. 1987. “Signaling Games and Stable Equilibria.” The Quarterly Journal of Economics 102 (2): 179–221. https://doi.org/10.2307/1885060.Suche in Google Scholar

Desai, P. S., and K. Srinivasan. 1995. “Demand Signalling Under Unobservable Effort in Franchising: Linear and Nonlinear Price Contracts.” Management Science 41 (10): 1608–23. https://doi.org/10.1287/mnsc.41.10.1608.Suche in Google Scholar

Kumar, V., B. R. Gordon, and K. Srinivasan. 2011. “Competitive Strategy for Open Source Software.” Marketing Science 30 (6): 1066–78. https://doi.org/10.1287/mksc.1110.0669.Suche in Google Scholar

Lubensky, D., and E. Schmidbauer “Free Product Trials: Disclosing Quality and Match Value.” Economic Inquiry (in press). https://doi.org/10.1111/ecin.12858.Suche in Google Scholar

Lynn, M. 1992. “Scarcity’s Enhancement of Desirability: The Role of Naive Economic Theories.” Basic and Applied Social Psychology 13 (1): 67–78. https://doi.org/10.1207/s15324834basp1301_6.Suche in Google Scholar

Mendelson, H., and S. Whang. 1990. “Optimal Incentive-Compatible Priority Pricing for the M/m/1 Queue.” Operations Research 38 (5): 870–83. https://doi.org/10.1287/opre.38.5.870.Suche in Google Scholar

Miklós-Thal, J., and J. Zhang. 2013. “(De) Marketing to Manage consumer Quality Inferences.” Journal of Marketing Research 50 (1): 55–69. https://doi.org/10.1509/jmr.11.0432.Suche in Google Scholar

Milgrom, P., and J. Roberts. 1986. “Price and Advertising Signals of Product Quality.” Journal of Political Economy 94 (4): 796–821. https://doi.org/10.1086/261408.Suche in Google Scholar

Moorthy, S., and K. Srinivasan. 1995. “Signaling Quality with a Money-Back Guarantee: The Role of Transaction costs.” Marketing Science 14 (4): 442–66. https://doi.org/10.1287/mksc.14.4.442.Suche in Google Scholar

Nelson, P. 1970. “Information and Consumer Behavior.” Journal of Political Economy 78 (2): 311–329. https://doi.org/10.1086/259630.Suche in Google Scholar

Nelson, P. 1974. “Advertising as Information.” Journal of Political Economy 82 (4): 729–54. https://doi.org/10.1086/260231.Suche in Google Scholar

Schmidbauer, E., and D. Lubensky. 2018. “New and Improved?.” International Journal of Industrial Organization 56: 26–48. https://doi.org/10.1016/j.ijindorg.2017.11.002.Suche in Google Scholar

Schmidbauer, E., and A. Stock. 2018. “Quality Signaling via Strikethrough Prices.” International Journal of Research in Marketing 35 (3): 524–32. https://doi.org/10.1016/j.ijresmar.2018.03.005.Suche in Google Scholar

Soberman, D. A. 2003. “Simultaneous Signaling and Screening with Warranties.” Journal of Marketing Research 40 (2): 176–92. https://doi.org/10.1509/jmkr.40.2.176.19228.Suche in Google Scholar

Stock, A., and S. Balachander. 2005. “The Making of a “Hot Product”: A Signalling Explanation of Marketers’ Scarcity Strategy.” Management Science 51 (8): 1181–92. https://doi.org/10.1287/mnsc.1050.0381.Suche in Google Scholar

Tereyağoğlu, N., and S. Veeraraghavan. 2012. “Selling to Conspicuous Consumers: Pricing, Production, and Sourcing Decisions.” Management Science 58 (12): 2168–89.10.1287/mnsc.1120.1545Suche in Google Scholar

Van Herpen, E., R. Pieters, and M. Zeelenberg. 2009. “When Demand Accelerates Demand: Trailing the Bandwagon.” Journal of Consumer Psychology 19 (3): 302–12. https://doi.org/10.1016/j.jcps.2009.01.001.Suche in Google Scholar

Zhao, H. 2000. “Raising Awareness and Signaling Quality to Uninformed Consumers: A Price-Advertising Model.” Marketing Science 19 (4): 390–6. https://doi.org/10.1287/mksc.19.4.390.11788.Suche in Google Scholar

Supplementary material

The online version of this article offers supplementary material: https://doi.org/10.1515/roms-2020-0022.

Received: 2020-04-06
Accepted: 2020-06-03
Published Online: 2020-08-19

© 2020 Walter de Gruyter GmbH, Berlin/Boston

Artikel in diesem Heft

  1. Relevance of the Higher-Order Brand Love Prototype in a Service Context
  2. How Culture Moderates the Effects of Justice in Service Recovery
  3. Influence of Images in Online Reviews for Search Goods on Helpfulness
  4. Examining the Impact of Contextual Factors in Brand Relationship Initiation and Maintenance: Evidence from Bottom of Pyramid Markets
  5. Exclusivity as a Signal of Quality in a Market with Word-of-Mouth Communication
  6. Relationship Marketing and Intangible Resources: The Mediating Effect of Loyalty
  7. Persuasive Advertising in a Vertically Differentiated Competitive Marketplace
https://doi.org/10.1515/roms-2020-0022
Schlagwörter für diesen Artikel
exclusivity; word-of-mouth communication; signaling; game theory

Artikel in diesem Heft

  1. Relevance of the Higher-Order Brand Love Prototype in a Service Context
  2. How Culture Moderates the Effects of Justice in Service Recovery
  3. Influence of Images in Online Reviews for Search Goods on Helpfulness
  4. Examining the Impact of Contextual Factors in Brand Relationship Initiation and Maintenance: Evidence from Bottom of Pyramid Markets
  5. Exclusivity as a Signal of Quality in a Market with Word-of-Mouth Communication
  6. Relationship Marketing and Intangible Resources: The Mediating Effect of Loyalty
  7. Persuasive Advertising in a Vertically Differentiated Competitive Marketplace
Jetzt anmelden und 20% sparen
Institutioneller Zugang
Wie funktioniert Authentifizierung?
Haben Sie eine Idee, wie wir unsere Website verbessern können?
Bitte schreiben Sie uns.
© 2025 De Gruyter Brill
Heruntergeladen am 28.9.2025 von https://www.degruyterbrill.com/document/doi/10.1515/roms-2020-0022/html
Button zum nach oben scrollen