Working Paper: CEPR ID: DP9462
Authors: Pascal Courty; Javad Nasiry
Abstract: Buying frenzies in which a firm intentionally undersupplies a product during its initial launch phase are a common practice within several industries such as electronics (cell phones, video games, game consoles), luxury cars, and fashion goods. We develop a dynamic model of buying frenzies that captures the production and sales of a product over time by the firm and then characterize the conditions under which frenzies are an optimal policy for the firm. We show that buying frenzies occur when customers are sufficiently uncertain about their product valuations and when customers discount the future but not excessively. Further, we propose a measure of
Keywords: advance selling; buying frenzy; customer desperation; strategic customer behavior
JEL Codes: D4; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm's decision to undersupply intentionally (D21) | increase in customer desperation (C69) |
| customer uncertainty regarding product valuations (D89) | buying frenzies (E32) |
| customer discounting the future but not excessively (D15) | buying frenzies (E32) |
| high level of uncertainty regarding valuations (G19) | invest resources to obtain the product early (D25) |
| customer desperation (C69) | influence firm's production and pricing strategies (L11) |
| firm's inability to commit to future prices and quantities (D43) | strategic customer behavior and waiting equilibria (C69) |
| Pareto dominance as a selection criterion among equilibria (D51) | customers coordinate on the equilibrium that maximizes their surplus (D43) |