DP9462 Product Launches and Buying Frenzies: A Dynamic Perspective

Author(s): Pascal Courty, Javad Nasiry
Publication Date: May 2013
Keyword(s): Advance Selling, Buying Frenzy, Customer Desperation
JEL(s): D4, L2
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9462

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