DP9462 | Product Launches and Buying Frenzies: A Dynamic Perspective

Publication Date

05/05/2013

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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