Information design through scarcity and social learning
Title: Information design through scarcity and social learning (with Nick Vikander, University of Copenhagen)
Abstract: We show that a firm may benefit from strategically creating scarcity for its product, in order 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. Imposing a capacity constraint directly limits sales but also makes information coarser for consumers, who react favorably to a sell-out because they only infer that demand must exceed capacity. Neither large cohorts nor unbounded private signals guarantee efficient learning, because the firm acts strategically to influence the consumers’ learning environment. Our results suggest that capacity constraints can serve as a useful tool to implement optimal information design in practice: if private signals are not too precise and capacity can be changed over time, then in large markets the firm’s optimal choice of capacity delivers the same expected sales as the Bayesian persuasion solution.