Buying Frenzies with Resale Market: Operational Strategies under Social Externality

Abstract

This paper considers a monopolist firm selling two collections of a single product sequentially to satisfy consumers' different social externalities. The first "capsule" collection has a unique design and is sold within a limited time frame. The second "mass" collection has the same functional features except for the appearance. Both snobs who pursue exclusivity and conformists who desire conformity are present in the market. Speculators, who have no consumption value for the product, enter the market to speculate quick money by reselling the purchased capsule collection on the resale market. All three groups of buyers are forward-looking. We examine the monopolist's pricing and production decisions at the beginning of each period and the buyers' behavior in each market. We find only snobs and speculators are willing to purchase the capsule collection. In the selling season of the mass collection, a large proportion of conformists lead to an upward-sloping demand curve, which allows the monopolist to use a "static" pricing scheme for both collections. Even though the monopolist can price the speculator out, she sets a lower price and releases more capsule products to foster the resale market. It can rivet the snobs with the capsule collection and reduces their protective effects on the law of demand for the mass collection. The resale market's presence also triggers more need for the mass collection by social influence and increases consumers' valuation of the product. Finally, we identify the conditions under which the monopolist prefers static pricing to dynamic pricing.

Keywords: Buying frenzies, resale market, social externality, conspicuous consumption