Sellouts, Beliefs, and Bandwagon Behavior

This paper examines how a firm can strategically use sellouts to influence beliefs about its good'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. I show that in a dynamic setting, the firm can use current sellouts to mislead consumers about future demand and increase future profits. Sellouts tend to occur when demand is low, they are accompanied by introductory pricing, and certain consumers benefit from others being misled.