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Buying frenzies in durable-goods markets

  • Ting Liu

    ()

    (Department of Economics, Stony Brook University)

  • Pasquale Schiraldi

    (Department of Economics,London School of Economic)

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 in their valuations. Some consumers are initially uninformed about their valuations and learn about them over time while others are informed through their lifetimes. Given demand uncertainty, first period sales may result in misallocation and lead to active trading on secondary market after the uncertainty is resolved. We characterize conditions under which the monopolist would like to restrict sales and generate a buying frenzy. We show how the monopolist may benefit from an active second-hand market.

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File URL: http://www.stonybrook.edu/economics/research/papers/2012/secondhandmarket_8_5.pdf
File Function: First version, 2012
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Paper provided by Stony Brook University, Department of Economics in its series Department of Economics Working Papers with number 12-07.

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Date of creation: Aug 2012
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Handle: RePEc:nys:sunysb:12-07
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