Fashion and Sales

Optimal pricing of horizontally differentiated durable goods is shown to yield a high and declining price. In particular we show that the initial price will be higher the higher the positive correlation in consumer tastes. If everybody learns which variety is fashionable before the seller sets the initial price, fashionable goods have a higher initial price, and are sold out at a larger discount. Fashionable goods are, however, less likely to show up on sale. These results are based on the assumption that there is asymmetric information about consumer preferences. It is also crucial that goods are produced to stock.