A simple model of panic buying

Abstract

We study a simple dynamic model to rationalize episodes of excess demand that resemble “panic buying” episodes in actual markets. In such episodes, consumers compete for a scarce good. Scarcity is triggered by an anticipated negative supply shock that takes place in a future period with positive probability. To avoid the risk of non-consumption, consumers can stockpile the good in earlier periods. We demonstrate that these stockpiling decisions can reinforce each other, creating a cascade of excess demand in several periods similar to “panic buying” episodes observed, for instance, during the Corona crisis. In our model, stockpiling is always detrimental to welfare, and we develop a suitable policy response.