The Economics Behind Buying Frenzies

COUNTRY, Pascal | NASIRY, Javad

We’ve all seen the photos of people queuing outside stores, eager to buy the latest hot product. “Buying frenzies” are a favorite topic in the media, and everyone has an opinion about them, and many may have even joined such a queue for a mobile phone or game console. One of Hong Kong’s most notable buying frenzies occurred when Apple released its iPad 2 in 2010 and lengthy queues formed even in the pouring rain; in fact, Apple staff were only too happy to hand out umbrellas and raincoats – bearing the Apple logo – to waiting customers.

The queues had formed because each store only had a limited number iPads and distributed them  on a first-come, first-served basis. Some customers were willing to pay considerably higher prices to obtain the product in the “gray” market. Bitter complaints about long queues and active scalping led Apple to require that potential customers participate in a daily lottery, and present e-mail confirmation of winning that lottery to the store, to purchase no more than two iPads.

A buying frenzy occurs when a firm intentionally undersupplies a market and leaves the rationed customers strictly worse off. This practice is common for such diverse products as luxury cars, fashion, and especially electronics such as cell phones, video games and game consoles. Shortages could be attributed to demand forecasting errors, issues in component supplies, or production problems; however, their repeated occurrence—particularly during the launch phase of innovative products—suggests that the true explanation involves a deliberate strategy.

The few studies to investigate this issue have considered mainly static models that capture situations where firms sell the product only once, such as tickets for sporting or concerts, limited-edition products, and one-off auctions. Yet the predictions of static models collapse when the firm releases items repeatedly over time, as is the case for most manufactured products because it wants to serve customers who were excluded from the early sales. In that case, why should customers be desperate to buy early when the product will still be available later? Pascal Courty and Javad Nasiry  proposed a dynamic model that explains an initial buying frenzy followed by a period of sales without frenzies.

They developed a model in which production and sales occurred in two periods and characterized the dynamics of sales, prices, and scarcity. They showed that the firm’s gains from inducing a buying frenzy, relative to matching supply and demand, can be economically substantial, and they investigated the conditions under which buying frenzies are optimal. Finally, they computed customers’ loss from being excluded during the initial launch phase, which is a proxy for “customer desperation”, and showed that this loss can be significant. This explains why customers may invest resources to obtain the good early – waiting in queues, for example – and why prices can be significantly higher in resale markets.

This study offers a tractable and convenient framework in which to analyze buying frenzies in a dynamic context. Buying frenzies occur when customers are sufficiently uncertain about their product valuations and when customers discount the future, but not excessively. They demonstrated how the firm’s and customers’ impatience affects the depth and breadth of a frenzy and showed that the loss from not obtaining the good in a frenzy can be substantial. Similarly, the firm’s gain from a frenzy policy can be economically large, and partially compensate for the firm’s lack of commitment to future prices.