2 min read.Updated: 11 Mar 2020, 10:54 PM ISTPuja Mehra
Reports from cities such as Delhi suggest that there is a sudden spurt in demand and stockpiling of hand sanitizers. Mint explains the economics of panic buying
Reports from cities such as Delhi suggest that there is a sudden spurt in demand and stockpiling of hand sanitizers. Many shops and stores have run out of stocks following the spread of fears over the coronavirus. Mint explains the economics of panic buying.
It is the phenomenon where consumers buy more of a product than they require out of the fear of missing out later. Such behaviour is triggered by natural calamities or pandemics. For instance, with Covid-19 spreading, supermarkets in many countries are reporting falling stocks of essentials, food items, toilet paper, masks, and hand sanitizers. Some people are stockpiling with a view to self-isolate, while many more, seeing stocks deplete, are buying large quantities out of the fear of imminent shortages. The hoarding could disrupt emergency supplies for patients and healthcare professionals and become self-fulfilling prophecies.
Is panic buying irrational behaviour?
No. It’s rational and an example of a Nash equilibrium, named after Nobel-winning economist John Nash, in game theory. The two players in the game are the shopper and everyone else. Its two strategies are panic buying or non-panic buying. If everyone buys without panicking, an equilibrium will be reached where supplies will remain normal with no shortages. However, if people indulge in panic buying, the optimal strategy for the shopper will be to do so also to avoid missing out on hand sanitizers. The likely outcome of the game is the second equilibrium where everyone indulges in panic buying, resulting in a shortage.
Should the government intervene?
No. Any attempts by government to step in as a holder of contingency reserves to be released in the open market will be cost-inefficient and will worsen the problem by triggering rent-seeking. Letting the price of essentials to rise to clear out the excess demand doesn’t work during emergency situations. It is called price gouging and can trigger backlash from people.
If depositors fear that a bank is about to run out of cash, they start taking out more than they need, endangering the bank’s ability to meet its liabilities. So, regulators place caps on withdrawals from banks. Similar policy steps to check raids by shoppers work best in panics. In the UK, the contingency plans of stores to ensure supplies during the Covid-19 episode involve home deliveries for self-isolating consumers and rationing of sales by placing caps on purchases, as emptying shelves trigger panic buying.
Can panic buying boost demand?
Not really. Rising sales amid the virus fears have pushed up shares of sanitizer, face mask, and glove manufactures. Godrej Consumer is ramping up output of sanitizers. ITC and HUL are making hygiene products available faster. Hand sanitizer segment is a small part of the liquid soap category in India. Sales spike is likely to be transient. Panic buying can drive up sales if large number of people regularly consume products, which they didn’t use earlier.