Scarcity and panic buying: the effect of regulation by subsidizing the supply and customer purchases during a crisis

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Abstract

During the first wave of the COVID-19 pandemic, in France, people cleared the shelves of butter; in Italy, it was pasta; in Great Britain, it was chicken. While there may be cultural disagreement on what is essential, clearly, in times of crisis, consumers stockpile the ‘essentials’. We address the problem of “panic buying”, which is characterized by increasing demand in the face of diminishing inventory. In such cases, prices may hike and firms (retailers) selling the high-demand product are quantity takers, in terms of supply, and price setters. We consider a manufacturer who sells a scarce product to a single retailer. The retailer seeks to maximize her profit, while in contrast, the manufacturer pursues a social objective of regulating and lowering the amount that the end customer (consumer) pays (including the cost of traveling to obtain the scarce product). By analyzing the competition between the two parties, retailer and manufacturer, we find that even when the regulator (manufacturer) makes a significant social commitment, neither subsidizing the retailer nor subsidizing the consumers necessarily curbs price hikes. Furthermore, there is a threshold ratio (i.e., proportion of the end price subsidized by the regulator) that determines the minimal budget that the regulator would need to allocate in order for subsidization to make a difference to consumers.

Original languageEnglish
Pages (from-to)251-276
Number of pages26
JournalAnnals of Operations Research
Volume318
Issue number1
DOIs
StatePublished - Nov 2022

Bibliographical note

Publisher Copyright:
© 2022, The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature.

Keywords

  • Non cooperative game
  • Panic buying
  • Pricing policy
  • Scarce product
  • Subsidization

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