The economics of panic buying
There has been a marked difference between what people say is socially acceptable and how they actually behave in practice. On the one hand, it feels wrong to buy large amounts of a particular product simply because you are afraid the shops are about to run out, especially when this could deprive other people who might be in much greater need. (If you don’t think this is a real problem, just watch the video of an exhausted nurse who was confronted by empty shelves.) On the other hand, lots of people appear to have been panic buying anyway.
For example, 61% of respondents to a recent Ipsos MORI poll agreed that it was unacceptable to bulk buy due to worries about coronavirus. Just 19% were willing to say it was OK to stock up on rice or pasta, and only 14% said the same of toilet paper. But these are now some of the goods in shortest supply.
Apparently, the depots that supply supermarkets usually only hold a week’s worth of stock, or even just a few days. This applies not only to the obvious perishable goods, such as fresh food, but also to relatively large items that take up a lot of space. Similarly, in normal times, supermarkets are unlikely to want to have shelves full of bulky, low-margin products. This helps to explain why they seem to have run out of loo rolls so quickly.
To be fair, panic buying is not necessarily irrational, for two reasons. The first is that the fear of empty shelves may be correct because it is self-fulfilling.
One way to think about this is the classic ‘prisoner’s dilemma’, where two people accused of a crime are each given the choice of confessing and giving evidence against the other, or remaining silent.
The socially optimal outcome is for both prisoners to say nothing, in which case each will be convicted of a lesser offence and go to prison for one year. If both betray the other, each will serve two years. But if only one confesses and one is silent, the former is let off completely and the other is convicted of a more serious charge, serving five years.
The problem is that whatever the second prisoner does, the individually rational choice is for the first to betray the other – and vice versa. As a result, both are likely to confess and end up going to prison for longer than if they had said nothing at all.
Panic buying is similar. It would be best if no-one does it. But if you are worried that supplies might run out because other people will beat you to it, then it makes sense for you to rush to the shops too.
However, there is also a second factor to consider here: even if there are plenty of goods in the pipeline and shops will soon be well stocked, some people may be unable to get to them. As the new coronavirus spreads, any household in the UK could be obliged to self-isolate for a period of several weeks, or even longer, at a moment’s notice. It may then make sense for every household to buy several weeks of essentials, just in case.
Part of the solution to both of these problems is better information. This means providing reassurance that the shops will soon be well stocked again. But this is easier said than done in the face of the hard evidence of empty shelves.
It also means reassuring people that anyone in lockdown will be provided with food and other essentials. The government is already planning to do this for the most vulnerable people who are being asked to stay at home for 12 weeks. Again, though, people may need some convincing, especially when normally reliable online retailers are failing to deliver.
Nonetheless, there are many good reasons to believe the current shortages will be temporary. For a start, most people who felt the need to build up a buffer of basic supplies have surely now done so already. We should therefore now be past the peak in demand. Put another way, how many loo rolls could anyone need?
What’s more, a number of additional steps are being taken to ease the shortages. The government is relaxing competition rules (designed to prevent firms operating as cartels) to allow major supermarkets to work together, for example by sharing data, depots and drivers. Restrictions on working hours and the times when stores can receive deliveries are also being lifted.
Major grocery retailers have also gone on a hiring spree. Some of these additional staff will be needed simply to cover absences due to illness or self-isolation. But others will be available to help to ease disruptions in the supply chain. Some supermarkets have also already started to limit product ranges in order to focus on the most essential goods.
Finally, it would be odd if I didn’t comment on the issue of pricing. In my view, the key question is whether an increase in prices would actually help to ease shortages.
At one extreme, I would have no sympathy for someone who has bulk bought existing stocks of loo rolls, or hand sanitisers, and is trying to sell them at vastly inflated prices in their corner shop or online. That is pure ‘profiteering’, or ‘price gouging’, and even I’m against it.
However, if an increase in the price of certain goods led to an increase in their availability, either by encouraging companies to divert production to where the demand is greatest, or by offsetting the additional costs associated with ramping up supply quickly, that is surely different.
Put another way, if a 10% price increase was the most effective way to guarantee ample supply of essential goods, and the poor could be protected by some form of subsidy, would this not be preferable to the alternative of widespread shortages?
As it happens, though, this should be a moot point. The best hope for dealing with the problem of empty shelves may not be an increase in prices, or even the provision of better information, but simply the passage of time. Indeed, there are already welcome signs that supply is starting to catch up with demand: my local supermarket is now selling loo rolls again. Must dash…
This article was first published on Julian Jessop’s blog.