Information Cascades and Beanie Babies
Beanie Babies are a line of floppy stuffed animals from Ty Inc. that were one of the largest fads of the 1990s. While admittedly adorable, it is hard to understand why these stuffed animals were able to become such a craze in a time where many other toy companies were struggling. Beanie Babies started off as a small line of stuffed animals meant to be sold in specialty stores. The small Mom and Pop gift shops where grandmothers may be finding a gift for their grandchildren. The original lines of beanie babies were very few in numbers, it started off selling to just a few stores. The toys sold pretty well in the beginning, they were good toys, but it took more than just a good toy to create the craze surrounding Beanie Babies. The fad of beanie babies can in part be explained by network effects and information cascades.
Network affects helped perpetuate the success of Beanie Babies. The initial success of the product showed that people would have low reservation prices, even with a small user base, Beanie Babies were a well liked and quality product. Secondly, the price of Beanie Babies never increased and always stayed at a low price, which kept the price below many people’s reservation prices. A low price and initially high user base led to network effects. Bolstered by scarcity there was a limited supply of Beanie Babies, for a variety of reasons, but mainly because Ty Inc. refused to sell Beanie Babies in major department and toy stores. As more people found out about the product they felt like they were missing out. Not only were they good toys, but they were also hard to find which made them seem more valuable. Beanie Babies were able to pass the tipping point and create upward pressure in the market. With the internet becoming a new and useful tool, Beanie Baby users were able to form a community around the toys, it benefitted Beanie Baby collectors to have more users to grow the community and increase the value of their own Beanies.
The start of the Beanie Baby craze can be attributed to a few suburban moms in one midwest town who decided to collecting the line of Beanie Babies. They were early users of the product and sent a signal that the product was good by trying to collect all of the different varieties of Beanies. Ty also created a sense of scarcity by limiting sales and selling only to small businesses. These two things sent signals to other potential buyers that the Beanie Babies were valuable. This started an information cascade that the Beanie Babies were valuable. The high signals continued as a few Beanie Babies sold on Ebay received astronomically high prices. Books about Beanie Baby valuations were written boasting their value and continuing to signal the perceived investment value. It wasn’t until a few years after the suburban moms sent their initial signal starting the information cascade that the cascade ended and people realized that Beanie Babies may not have been worth as much as others claimed. That realization marked the end of the craze, earning the toy the title of fad.
Source: The Great Beanie Baby Bubble by Zac Bissonnette