PANIC BUYING OF GROCERIES: AN ECONOMIC ANALYSIS
Elizabeth John
March 28th, 2020
What’s happening to the supermarkets?
As Covid-19 continues to ravage countries around the world, governments are being forced to implement harsh new restrictions on basic rights and freedoms that modern society has come to take as a given.
European countries have been in shutdown for weeks. Boris Johnson has overnight introduced lockdown measures in the UK that are being dubbed the most severe in British history. Indeed, according to the WHO, the pandemic is accelerating. The first 100,000 cases took 67 days to appear. The second 100,000 took 11 days. The third has taken just 4 days.
It’s a bleak outlook. We’re reminded of it 24/7 by our ever-present phones, radios and TVs. Justifiably, people are scared. However, that fear is manifesting itself in a frightening phenomenon: empty supermarket shelves.
Our society is fast becoming accustomed to a scary new reality: elderly citizens staring despondently at empty supermarket shelves; knife attacks in the toilet paper aisles; and restrictions on purchase quantities of suddenly scarce pantry staples such as rice, pasta and flour. Panic buying has become our new norm.
The behaviour has been derided as “un-Australian” by politicians and public figures. If you manage to get your hands on more than one pouch of microwaveable rice, for example, you’re likely to experience disapproving looks and an audible “tsk-tsk” from fellow shoppers. Parents attempting to shop for growing families are confronted with feelings of social anxiety as they fill their trollies with household essentials.
Long story short, we’re all aware that panic buying is happening. We’re all aware that it’s far from beneficial to society. We’re also all aware that the advice from higher-ups is that this practice is to be actively discouraged. So why is it still happening?
The answer lies in game theory.
Game Theory
Academically speaking, game theory is the study of how the interacting choices of people produce outcomes with respect to their individual preferences. In other words, game theory provides a tool by which it is possible to analyse situations wherein person A’s most beneficial course of action depends on her expectations as to how person B will behave (and vice versa).
The set-up
So, what does this mean for panic buying? Well, let’s assume that you’re in a game. There are two players: yourself, and the rest of the public. There are two options: you either panic buy, or you don’t. You won’t know what the rest of the public is going to do before you are required to make your choice. Each choice has an associated result (or “payoff”); however, the payoff depends in part on the choice made by the rest of the public. The payoffs are laid out in the table below in the white cells:
The numbers
For ease of understanding, each payoff will be converted into a number. This number represents the amount of utility that each scenario provides to both you and the rest of the public. In each white cell, the number on the left is your utility, and the number on the right is the rest of the public’s utility.
Utility is what economists use to measure the satisfaction that an individual derives from the consumption of a commodity. In this table, where everyone panic buys, the utility experienced by each party is relatively low. This is because, while the parties might be able to purchase some goods, the quantities that they are obtaining are probably a lot lower than what they might otherwise need to get by comfortably.
Where you panic buy and no one else does, your utility is very high. This is because you have curated a pretty sturdy stockpile, one that means that you won’t need to venture out to the shops again for a while. Accordingly, not only are you getting utility from the goods you have panic bought, but you are also getting utility from not needing to go to the shops in the foreseeable future. The rest of the public, however, gets no utility. This is because there is simply nothing there for them to buy. The converse of this outcome will occur where you don’t panic buy but everyone else does.
The final scenario is where no one panic buys. Everyone buys the quantity that they need to get by. Everyone gains utility from the consumption of the groceries that they have purchased. However, the payoff for each party is lower than were they to panic buy in isolation. This is because each party bears the risk of the food running out at some point in the future. This has the resulting effect that utility is lower across the board.
So, what does this mean for the decision to panic buy? Remember that in this game, you don’t know what the rest of the public will choose. However, your utility payoff is dependent on what the rest of the public actually does. So, let’s analyse the optimal choice for you to make – row by row.
The rest of the public panic buys
If you assume that the rest of the public will panic buy, then you have two options:
You panic buy – your payoff is 1
You don’t panic buy – your payoff is 0
Of course, the more attractive choice for you is to panic buy. It carries the higher utility payoff.
The rest of the public doesn’t panic buy
If you assume that the rest of the public will not panic buy, then you have another two options:
You panic buy – your payoff is 7
You don’t panic buy – your payoff is 3
Again, the more attractive choice for you is to panic buy. It carries a much higher utility payoff.
So really, irrespective of what the rest of the public decides to do, it will always be more efficient for you to panic buy.
Equally, if you run the same analysis from the perspective of the rest of the public, you will reach the same result: that the optimal strategy is to panic buy.
What does this mean?
So here we can see a convergence of personal interests: on this analysis, you will panic buy and so will the rest of the public. This result is also what is called a “Nash Equilibrium”. A Nash Equilibrium occurs where no player can improve her payoff by changing her strategy, given the strategies of the other players in the game. In other words, there is no incentive to change strategy, as doing so carries a risk of reduction in payoff. This basically means that you’re stuck – you’re stuck in a panic buying rut, and so is the rest of the public. And this is exactly what we’re seeing transpire across the country.
It is also important to note that this is not the only Nash Equilibrium in this game. If both you and the rest of the public choose not to panic buy, then the utility payoff for both parties is 2. Neither party can change its strategy (i.e. by choosing to panic buy) without the risk of reducing their utility payoffs (i.e. from 2 to 1). If you also look at this outcome with a view to achieving the equitable allocation of resources, this would appear to be the more socially acceptable outcome.
So why are we not landing on this outcome? This is because we are experiencing “coordination failure”. The risk that the other party will panic buy when you don’t and the associated nosedive in your utility payoff mean that you are always incentivised to panic buy. While this is the case, consumers are unlikely to coordinate to achieve the socially optimal result.
How to rectify this coordination failure
Alfredo R. Paloyo, a Lecturer in the School of Accounting, Economics and Finance at the University of Wollongong, has identified three potential solutions to prevent this coordination failure:
Allow the price of scarce goods to increase to reduce demand;
Have the government act as a guarantor by keeping stockpiles; or
Ration the commodity.
Mr Paloyo indicates that the third option is probably the most feasible. Let’s explore why that is the case.
While the first of these options in theory requires only reliance on market mechanisms to mitigate panic buying (the law of demand means that, all other factors remaining constant, when the price of a product increases, the demand for that product will decrease), hikes in the prices of home staples such as toilet paper, rice and pasta could have far reaching consequences for lower socio-economic households. Moreover, supermarkets are unlikely to follow this avenue for two reasons:
it’s expensive to actually change prices (think along the lines of the salaries for pricing analysts, the costs of printing new price tickets, the wages of the staff who will put up the tickets in store, the cost of updating the website etc. – these costs are called “menu costs”); and
such a strategy is likely to lead to consumer backlash in the future (we’re already seeing outrage at the price of lettuce in Bundaberg).
The second option, the government stockpile option, seems like a good idea in theory. However, it’s questionable whether this is an administratively workable option.
We’re already seeing the third option being implemented across the country. Coles, Woolworths and other major grocery retailers are placing limits on the amount of milk, toilet paper, rice, pasta and other goods that consumers can purchase in any one transaction. We’re also seeing the first hour of trading being reserved by these retailers for the elderly and those living with disabilities.
Whether or not these measures will be effective to avoid coordination failure remains to be seen. For now, the shelves are still bare.