Apportioning limited supplies to competing retailers under panic buying and associated consumer traveling costs

Abstract

Motivated by rising product insecurity during the initial waves of the COVID-19 pandemic, and the resultant need for consumers to travel further to buy scarce products, we address the possibility of shortages as a result of panic buying. In particular, we study the effect of competition on inventory and pricing by considering the case in which a manufacturer apportions a scarce product to two competing retailers. We find that competition does not always effectively respond to panic buying and can cause frequent price oscillations when the market is shared equally between the two retail firms. On the other hand, in contrast to the case of monopolistic retailing, competition enables the manufacturer to regulate the cost that consumers incur even if the wholesale price is fixed. Specifically, when the market location is biased towards one of the two firms, the manufacturer can apportion supplies to the firms in such a way as to increase the average cost (which includes the retail price and the consumers’ traveling costs), thereby mitigating panic buying and reducing the risk of shortage. Alternatively, when the panic is not severe, the manufacturer can apportion in a way that decreases the average cost, thereby meeting a social welfare-oriented goal in the framework of distributing a scarce product.