A dynamic model of rational “panic buying”

Abstract

This paper analyzes panic buying of storable consumer products accompanied by disasters, using a novel consumer-search theoretic equilibrium model where consumers follow (S,s) inventory policies. We show that, even if consumers are fully rational, an anticipated temporary increase in consumer shopping costs (as well as conventional demand and supply shocks) can trigger an upward spiral of hoarding demand and result in serious shortages. Due to congestion externalities, panic buying leads to the misallocation of storable products and substantial welfare loss. The model is calibrated using survey data and reveals that the timing of recognizing the shopping-cost rise is crucial for the severity of panic buying. Some policy options, such as purchase quotas and future sales-tax reductions, are suggested to mitigate panic buying.

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