Palm Pre turning economic fundamentals on their head?

In a recent story on FierceWireless, they reported a very interesting tidbit, even if it turns out to be just a rumor:

“Palm may limit its stockpile of Pre smartphones at launch to fewer than 400,000 units, according to analysts surveyed by Bloomberg News. The goal? Generate more buzz after the handset quickly sells out.”

At a glance, this appears to be a backwards notion, why undercut supply, shouldn’t people be able to buy your product? Simply, yes, you want your product to generate revenue, but sometimes a little patience pays off in the long run. This term for when demand is greater than supply is simply called “excess demand” and in the past has been viewed as something that needs to be corrected, but in recent times, having excess demand in the field of consumer electronics has become a boon, not a bane. The principle is simple: produce too few of a desired good and it not only conveys to the public that the device is selling exceptionally well (even if it isn’t) and those who want it generate a lot of buzz, mostly about how much they want the product, this in turn makes other people excited about their product.

This has proved extremely beneficial for companies like Nintendo who couldn’t keep their Wii console on shelves, even if it was (supposedly) unintentional; and similarly, the launch of the iPhone 3G launch.

There is one problem though, this strategy can backfire if competitors play their cards right. While some would-be consumers maintain their excitement, if forced to wait too long they may flock to other products, especially if they are released with appropriate timing. For instance, if Palm forces a bunch of consumers to wait a couple of weeks to get the Pre, and then Apple comes out with a new iPhone during the lull, Palm may lose a lot of customers.

The other big upside is that this can potentially save these companies a lot of money should the worst happen: the device flops. I doubt such a thing will happen in the Palm Pre case, but it’s something to consider considering Palm’s rough times lately.