Sellouts, Beliefs, and Bandwagon Behavior
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Sellouts, Beliefs, and Bandwagon Behavior. / Vikander, Nick.
In: The B.E. Journal of Theoretical Economics, Vol. 19, No. 1, 20160187, 2019.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - Sellouts, Beliefs, and Bandwagon Behavior
AU - Vikander, Nick
PY - 2019
Y1 - 2019
N2 - 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.
AB - 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.
KW - Faculty of Social Sciences
KW - sellouts
KW - conformity
KW - bounded rationality
U2 - 10.1515/bejte-2016-0187
DO - 10.1515/bejte-2016-0187
M3 - Journal article
VL - 19
JO - The B.E. Journal of Theoretical Economics
JF - The B.E. Journal of Theoretical Economics
SN - 2194-6124
IS - 1
M1 - 20160187
ER -
ID: 202238918