If it's an underestimate of demand, that seems like a very common mistake--most gaming consoles and new Apple products have this exact same problem. Either they're systemically "underestimating" demand to mitigate risk or increase the prestige of the product (by making it rare and hard to get), or the peak demand for something like an iPad or Wii within the first month is just completely beyond any reasonable manufacturing capacity.

In an idealized market, of course, manufacturing capacity would ramp up with demand, but that's because price does, too. In reality, while the market price will go up enough for scalpers to play arbitrage, the producer doesn't capture this surplus and has no incentive to increase quantity supplied.

The issue is that if you OVERSHOOT, you have inventory you paid for but do not get paid for in turn.

You almost always want to undershoot.

That's the risk mitigation part, and in the 90's Apple had a lot of problems like that (too much inventory of unwanted products) but then you start to wonder how, for instance, the Nintendo Wii went a whole year understocked.

It costs money to retool a factory to produce something different. If the cost of lost sales due to undersupply is lower than the cost of setting up another factory, it makes sense to undersupply.

Also in the case of Wii, Nintendo probably was expecting a sales downturn "any day now"

They almost certainly undershoot deliberately because that creates a sense of scarcity which makes the devices seem more desirable.

I'm wondering if Apple could pull off the continuous auction approach with new products?

It would have worked like this for some period of time after the announcement but before the official release dates Apple would sell you a numbered product at a multiple of the announced retail price, the earlier the date, the higher the multiple. So the very first iThingy would go for say $100,000 and the next batch might go for $50,000 each, and the third batch would be priced at $25,000 and so on. This would let them practice almost perfect price discrimination; most customers would pay what the product was worth to them...

There are of course very good reasons Apple does not do this.

What are the reasons in your opinion? I can see that it might give them a bad reputation, but that could be mitigated by parting with most of the profits for charity.

Or are they trying to create an image of scarcity and desirability?

What happens if someone has a bad experience with a preproduction device that they paid 100x premium for?

Once you factor in risks like that, selling a few models at an extreme markup doesn't seem quite as attractive.

Or I didn't want to talk about pre-production. I meant to talk about the begin of the normal production run, where demand for hyped devices (say: Wii, Nintendo DS, iPhone, iPad) far outstrips supply.

By the way, it may be rational for companies to let this happen, since mass production facilities cost a lot of money to set up, and they have to aim at the longer term demand instead of the spike at the beginning.