Inducing herding with capacity constraints

Working paper

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.

Authors: Parakhonyak, A; Vikander, N

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2016-10-23
• Paper number: 808
• Keywords: capacity constraints; informational cascades; herding