Sellouts, Beliefs, and Bandwagon Behavior

Abstract

This paper examines how a firm can strategically use sellouts to influence consumers’ beliefs about its product’s popularity. A monopolist faces a market of conformist consumers, whose willingness to pay is increasing in their beliefs about aggregate demand. Consumers are broadly rational but have limited strategic reasoning about the firm’s incentives. Formally, I apply the concept of a ‘cursed equilibrium’, where consumers neglect how the firm’s chosen actions might be correlated with its private information about demand. I show that in a dynamic setting, the firm may choose its price and capacity so as to generate sellouts, specifically to exploit consumers’ limited reasoning. It does so to effectively conceal unfavorable information from consumers about past demand in a way that increases future profits. Sellouts tend to occur when demand is low, rather than high, and may be accompanied by introductory pricing. The analysis also demonstrates that the firm’s ability to mislead some consumers always benefits certain others, and can result in higher overall consumer surplus.

Information design through scarcity and social learning

“…Vikander (2019) considers a privately informed firm that may limit capacity to influence consumer beliefs, but assumes bounded rationality and social image concerns.7 Other differences in our analysis include the link with optimal Bayesian persuasion, the winner's curse effect, and the fact that a firm's strategic choice of capacity can help an incorrect positive cascade to be maintained.8 We use irreversible capacity in our main analysis, and later explicitly relax this assumption by allowing the seller to adjust capacity over time.9 Parsa et al (2005) document that about 60% of new restaurants fail within three years, which suggests that their owners had imprecise information about quality when opening and setting capacity. We require that the seller and consumers hold the same prior, as is common in the literature on social learning, see, e.g.,Bose et al (2006),Bose et al (2008) andBhalla (2013).…”