Product Launches and Buying Frenzies: A Dynamic Perspective

Buying frenzies caused by a firm's intentional undersupplying of a new product are frequently evident in several industries including electronics (cell phones, video games), luxury automobiles, and fashion goods. We develop a dynamic model of buying frenzies that incorporates the firm's manufacturing and sale of a product over time and characterizes the conditions under which inducing such frenzies is an optimal strategy. We find that buying frenzies occur when customers are sufficiently uncertain about their valuations of the product and when they discount the future sufficiently but not excessively. We propose measures of customer desperation and of the extent of scarcity to measure the depth and breadth of buying frenzies, respectively. We also demonstrate that such frenzies can have a significantly positive effect on firm profits and partially recover the loss due to non-commitment to future prices. This study provides managerial insights on how firms can influence market response to a new product through production, pricing, and inventory decisions to induce profitable frenzies.