Sellouts, Beliefs, and Bandwagon Behavior

This paper examines how a firm can strategically use sellouts to influence consumers’ beliefs about its product’s popularity. A monopolist faces a market of conformist consumers, whose willingness to pay is increasing in their beliefs about aggregate demand. Consumers are broadly rational but have limited strategic reasoning about the firm’s incentives. Formally, I apply the concept of a ‘cursed equilibrium’, where consumers neglect how the firm’s chosen actions might be correlated with its private information about demand. I show that in a dynamic setting, the firm may choose its price and capacity so as to generate sellouts, specifically to exploit consumers’ limited reasoning. It does so to effectively conceal unfavorable information from consumers about past demand in a way that increases future profits. Sellouts tend to occur when demand is low, rather than high, and may be accompanied by introductory pricing. The analysis also demonstrates that the firm’s ability to mislead some consumers always benefits certain others, and can result in higher overall consumer surplus.