Posted by Mike Smith :: March 17, 2009 @ 5:33 am

In the perfect economic model, supply and demand meet at that magical inflection point where the optimal price is achieved. Higher prices would reduce demand and leave a surplus of supply, and lower prices would raise demand to the point where supply could not keep up. One way to raise prices and increase demand is to create an artificial supply shortage.

Companies are often accused of withholding supply any time they are unable to keep up with demand. Tyco and Nintendo are classic examples, as both were suspected of creating demand by limiting their products, Tickle Me Elmo and Wii, respectively. In some cases, it is simply a matter of over-marketing a product or a true inability to meet unexpectedly high demand.

One company that doesn’t try to hide its price manipulation is Disney. The company only sells its movies for a limited time and then put them back in the “Disney Vault” for years at a time. This practice has traditionally allowed Disney to increase demand both before the product goes into the vault and again when it comes back out.

The efforts by Disney are increasingly less successful thanks to eBay and similar resale sites. We’ve all heard the stories of desperate consumers getting gouged on eBay when they simply have to have a product that is otherwise unavailable. That continues to be the case when a true supply shortage exists. But when supply is artificially reduced, eBay actually becomes a consumer’s best friend. Initially this might not have been the case when only a few people were savvy enough to load up on merchandise that was soon to be in short supply. Now, a phenomenon similar to eBay’s effect on Woot Arbitrage is taking place. So many people realize that Disney movies will be in greater demand once in the vault that they are loading up on their supply, which is readily available, before that date. This leads to tons of supply in the secondary market, keeping prices low.

New products in short supply will continue to keep prices high. Fortunately, some sales tricks, like those of Disney, are far less damaging to consumers than they once were. Before paying a premium price for a product in high demand, ask yourself whether it’s true demand or simply the marketing and sales tactics of the manufacturer artificially inflating prices.

What other examples of artificial supply shortages have you experienced?