Models of Herding Behavior in Operations Management

When new innovative products and services are introduced into the market, the consumers often do not have complete information about the quality of such products or services. Even though they collect information from several sources, their private information about the product is generally noisy and inaccurate. Under such cases, the consumers complement their private information with some available public information based on what /other/ consumers chose. For example, customers might look at the queue length information in choosing a restaurant/sports bar, or examine available sales information while choosing a recently released book, or observe stock-out information in buying a new electronic product. In these cases, the consumers might ignore their own private information and could decide to wait in the longer queue, or to purchase a more popular book, or to wait for a stocked-out electronic product. Modeling consumer behavior with such positive externalities causes the overall demand to be significantly different from traditionally modeled consumer demand. Not surprisingly, such consumer decision processes also significantly impact firms’ capacity decisions: Long queues or stock-outs might signal better quality and thus generate more demand. Operations management literature in this area is nascent and emerging. In this chapter, we present current results in the operations management literature from papers that model consumer herding behavior and explore important future research directions.