Panics and Prices

Abstract

Rumors of a shortage may create higher-order uncertainty and cause panic buying even when there is no real shortage and most consumers are aware of this fact. We study the role of prices in alleviating, or even preventing, panic buying caused by such rumors. Under some circumstances, flexible prices fail to do so and panic buying is the unique equilibrium outcome. In these circumstances, fixed prices prevent panic buying and lead to higher consumer surplus despite the possibility of rationing. Producer surplus may be higher as well.