Inducing Herding with Capacity Constraints

Alexei Parakhonyak and Nick Vikander

No 808, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper shows that a rm may benefit from restricting capacity so as to trigger herding behavior from consumers, in situations where such behavior is otherwise unlikely. We consider a setting with social learning, where consumers observe sales from previous cohorts and update beliefs about product quality before making their purchase. A capacity constraint directly limits sales but also results in coarser information: upon observing a sellout, consumers attach positive probability to all levels of demand that exceed the constraint. The resulting discrete jump in beliefs following a sellout benefits the firm, and can make it optimal to restrict capacity.

Keywords: Capacity Constraints; Herding; Informational Cascades (search for similar items in EconPapers)
JEL-codes: D82 D83 L15 (search for similar items in EconPapers)
Date: 2016-10-23
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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