As the holiday shopping season approaches, toy manufacturers and retailers are employing the sale tactic of exclusively distributing certain products only at certain stores. These products are called "exclusives" and mostly include collectibles such as action figures from popular movies such as Batman and Star Wars and nostalgic paraphernalia. In "Toy Stores Spur Buying Frenzies With Exclusives" (Wall Street Journal, 1/2/97), the authors discuss the use of and motivation behind exclusive retailing. Exclusives have been a part of retailing for years "but this Christmas season they are bigger than ever." F.A.O. Schwarz Inc. predicts that 30% of its sales this year will be toys unavailable in other stores. Because exclusives are made in runs of "50,000 or less" and are distributed only in certain stores and locations, the demand for the products far exceeds their supply.
When the amount of products demanded by consumers exceeds their supply, a shortage exists as indicated by Figure 1. This shortage results in some consumers not being able to get the products that they are willing to buy at that particular price. The use of exclusive retailing creates shortages of those exclusive products. "Barbie's friend in a wheel-chair" sold out in two weeks this past summer. Han Solo figures were sold out in three minutes at 8:03am in Dearborn, Michigan. And in New Hampshire, Star Wars figures were sold exclusively at Target where the store manager handed out the first 16 people cards to claim the figures and "told the rest they were out of luck."
When shortages exist, "non-price rationing" is often employed. In the case of exclusives, customers usually wait in line for hours before the store opens in order to insure that their product will not be sold out before they are able to purchase one. Others drive many miles to other locations that sell these exclusives because the products have all been sold at closer locations. Still others suffer the risk of actual physical harm that may exist when a large number or consumers try to purchase a limited number of exclusives. In a Target store in Deerfield, Ohio, "in a rush to the shelves, one elderly woman and a child were knocked down in the aisles." These all constitute different forms of additional costs that non-price rationing employs.
The authors of the article suggest that the motivation behind exclusive retailing lies in increased profits because their products can be sold at higher prices. "Action figures are priced at under $7 a piece; exclusives generally sell for $10 to $80 a pop." However, the flaw in this analysis is that profits can be increased even more if exclusive retailing was not used, but rather automatic market forces were allowed to adjust prices to clear the market. Strict exclusive retailing practice greatly limits the amount supplied to consumers and will maintain the shortage that is indicated in Figure 1. Even though the products can be sold at higher prices, the long lines and other forms of non-price rationing that exist show that the amount demanded still greatly exceeds the supply.
If we consider the success of manufacturers' profit-making in terms of producer surplus, Figure 2 shows that the producer surplus (area A) is less at a shortage than at the equilibrium. At equilibrium the additional surplus gained is indicated by area B. At the same time, consumers cannot have the additional consumer surplus that is gained when the product is sold and supplied at the equilibrium price as indicated in Figure 3 where areas AC are consumer surplus with exclusives and areas AB are consumer surplus at equilibrium price without exclusives. Overall, this creates a total "toy social welfare loss" that is shown in Figure 4 as area W. Instead of using exclusive retailing, manufacturers can maximize their sales and profits by widely distributing their products at higher prices until the equilibrium point is reached where the quantity of the product demanded at that price will equal the quantity supplied.
Using a representation of supply and demand relationships we can analyze the effects of the exclusive retailing that was detailed in the article. From the supply/demand graph, we can see that exclusives create a product shortage and prevent manufacturers and customers from receiving their full potentials in producer and consumer surpluses, but rather is wasted in the form of a welfare loss.
Although it may seem obvious that exclusives prevent a market equilibrium by creating a shortage, manufacturers will continue to use exclusive retailing because it minimizes the risk of overestimating demand. "The manufacturers gain an assured market, even though such toys might sell more units if offered in more stores." In addition, retailers draw more customers by selling exclusives and thus are willing to "swallow the whole order" thus further reducing the risks taken by the manufacturer. Therefore, although an analysis of exclusive retailing using fundamental economic principles may allow logical predictions of market behavior, the dynamics of market interactions are often too complex to take into account with a simple model.
