Buying frenzies in durable-goods markets

Ting Liu and Pasquale Schiraldi ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We explain why a durable-goods monopolist would like to create a shortage during the launch phase of a new product. We argue that this incentive arises from the presence of a second-hand market and uncertainty about consumers׳ willingness to pay for the good. Consumers are heterogeneous and initially uninformed about their valuations but learn about them over time. Given demand uncertainty, first period sales may result in misallocation and lead to active trading on the secondary market after the uncertainty is resolved. Trading on the second-hand market will generate additional surplus. This surplus can be captured by the monopolist ex-ante because consumers are forward-looking, and the price they are willing to pay incorporates the product׳s resale value. As a consequence, when selling to uninformed consumers, the monopolist faces the trade-off between more sales today and a lower profit margin. Specifically, because the product׳s resale value is negatively related to the stock of the good in the second-hand market, selling more units today will result in a lower equilibrium price of the product. Therefore, the monopolist may find it optimal to create a shortage and ration consumers to the second period. We characterize conditions under which the monopolist would like to restrict sales and generate buying frenzies.

Keywords: buying frenzies; second-hand market; durable goods; consumer uncertainty (search for similar items in EconPapers)
JEL-codes: J01 L81 N0 R14 (search for similar items in EconPapers)
Date: 2014-08
New Economics Papers: this item is included in nep-com, nep-mic and nep-mkt
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Published in European Economic Review, August, 2014, 70, pp. 1-16. ISSN: 0014-2921

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http://eprints.lse.ac.uk/56704/ Open access version. (application/pdf)

Related works:
Journal Article: Buying frenzies in durable-goods markets (2014)
Working Paper: Buying frenzies in durable-goods markets (2012)
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