Question

This Tuesday evening at 7:05 p.m., Justin Wolfers, an economics professor at the University of Michigan, started a provocative Twitter thread about panic buying. Spurred by fear of the spreading coronavirus, shoppers have been mobbing stores worldwide. They’re stockpiling canned goods, flour, sugar, bottled water, hand sanitizer—and toilet paper.

In Australia, where Wolfers was born, one desperate customer reportedly pulled a knife trying to score the last roll on the shelf at a Woolworths Supermarket in Sydney.

Wolfers believes desperate buyers aren’t crazy. “The economics of toilet paper shortages is the same as bank runs,” he tweeted. You stockpile toilet paper because others are stocking up too, depleting supplies.

“My argument is simply that panic buying can be rational,” said Wolfers in a phone interview with Forbes on Wednesday. “There is nothing inherent in markets that prevents this.” Until the FDIC started guaranteeing bank deposits in 1933, it made sense for nervous savers to pull their money out when they saw their neighbors doing the same.

What can be done to preclude toilet paper shortage-sparked violence? “The U.S. needs a strategic toilet paper reserve,” said Wolfers, guaranteeing that Americans have the supplies they need should stores run out.

In all seriousness, what does Wolfers think fear-sparked buying means for U.S. retailers like Costco, Walmart, Target and Kroger? “In the short term it’s good news,” he says, because extra purchases spike revenues. But in the long run, it’s unlikely to change those companies’ fortunes. “Once they have more toilet paper, people aren’t going to poo more,” he says. They’ll wait until their supply runs out to make further purchases.

Oliver Chen, a retail analyst at Cowen in New York, says virus-driven panic buying is giving a boost to curbside services offered by companies like Target and Walmart. Target reported this week in an earnings call that once customers try the service, where they order and pay online and then pick up their purchases at a designated spot outside a store, they increase their spending at Target by 25%. Cowen estimates that only 10% to 11% of shoppers use the service, leaving plenty of room for growth.

One more plus for retailers: “When you use the curbside service, it increases your loyalty as a shopper,” says Chen. He predicts that panic buying will drive up sales by 1% to 2% in the first quarter at retailers who sell groceries and staples. Given that operating margins are a low 3% to 7%, even a small increase in sales is significant.

Sucharita Kodali, an analyst at Forrester, says many retailers have missed an opportunity to hike prices during the scare. “What should have been a winning lottery ticket these guys were handed, they basically squandered,” she says. Without gouging customers, stores could have easily hiked prices by 10% or more on staples and banked the extra profit. “A lot of retailers foolishly let that opportunity pass,” she says. (Most state price-gouging laws, barring increases of 10% or more, only kick in after a state of emergency has been called.)

Wolfers disagrees with Kodali about the wisdom of price hikes during a perceived public health crisis. “Costco’s implicit promise to the customer is, ‘We will never screw you,’” he says. “Raising prices on toilet paper would destroy that trust.”

Rupesh Parikh, a retail analyst at Oppenheimer, says Costco made the right call to hold prices steady. “Costco is a company that puts the customer at the center of everything they do,” he says.

Today Costco reported that February 2020 sales increased 13.8% over the previous year due to “concerns over the coronavirus.” Though Parikh rates the stock a “buy,” he doesn’t believe the Issaquah, Washington-based chain, whose revenue hit $155 billion last year, will benefit from coronavirus buying in the long run. Shoppers who bought extra staples in February will wait to replenish them, possibly causing a sales dip in coming months. “If people don’t use up their supplies, that poses a risk going forward,” he says.

In Australia, where there are 52 confirmed cases of coronavirus including 2 deaths, a Costco store in Canberra has reportedly set limits on toilet paper purchases. Customers can buy no more than two 48-roll packs at a time. That should last them a while.

Tasks:

Study “The Economics Of Panic Buying” online article above and complete the following tasks.

1. Describe your knowledge or experience with the panic buying that took place in Sydney/Melbourne.

2. Use the demand and supply model to describe the phenomenon of the panic buying which you describe in task 1 and illustrate the consequences of the panic buying on market equilibrium. Discuss whether there is an increase in demand or an increase in quantity demanded during the panic buying and explain your answer.   

3. Use the demand and supply model to illustrate the sellers’ responses to the panic buying, such as the curbside service provided by Target and Walmart. Discuss the impact of the curbside service on market equilibrium.

Answer 1

SOLUTION:-

* There was extensive panic buying in almost all regions as witnessed in Sydney/Melbourne as several people increased their demand for the products which were basically essential commodities due to fear that the commodities could go scarce and they may not be able to get out of the house afterwards to buy those commodities. There was a peer effect as others increased their demand for commodities, so did the other families as they did not want to be left out of the game and face scarcity of products and services. People were stockpiling essentials which could last for a longer duration and thus were stockpiling them in bulk quantities in order to stay ahead and not visit the supermarkets and reduce the chance of not getting basic essentials after a while.

* An increase in demand occurs when the demand curve shifts to the right, while an increase in quantity demanded occurs when there is a movement along the demand curve due to the change in price. Thus there was an increase in demand as at the same price,people started to demand more goods.

* Thus there is an increase in demand and there is no equilibrium as demand increase and there is a shortage in the market as the supply is the same while demand is more at the same price.

* Led by the increase in curbside services, the retailers are trying to increase the supply, through various ways a customer can access the products sold at the retailers. Thus people tend to spend more and there is an equilibrium attained.

* Thus the equilibrium shifts to the right from E1 to E2 as supply is increased via curbside services and consumers demand more.

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