Product Launches and Buying Frenzies: A Dynamic Perspective

Abstract

Buying frenzies in which a firm 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 firm and then characterize the conditions under which frenzies are an optimal policy for the firm. 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 "customer desperation" to measure the magnitude of frenzies and demonstrate that buying frenzies can have a signicant impact on the firm's profit. This paper provides managerial insights on how firms can affect the market response to a new product through their pricing, production, and inventory decisions to induce profitable frenzies.

Keywords: Advance Selling, Buying Frenzy, Customer Desperation, Strategic Customer Behavior

JEL Classification: D4, D8