Question

During the pandemic, stockpiling behavior have been criticized in the newspapers and described as irrational. From a game theory perspective, stockpiling of toilet paper can be modeled as a strategic game. Let’s assume that we have two players who can choose between option 1: running to buy toilet paper (stockpiling behavior); and option 2: waiting to buy toilet paper. They believe that there is a risk that supermarket will run out of stock. The following matrix gives the payoffs of each choice, where in each cell, the first number is the payoff of player A and the second number is the payoff of player B. Player B Wait to buy Run to buy Player A Wait to buy 3, 3 1,4 Run to buy 4,1 2,2 a. Explain the strategic interactions behind the stockpiling behavior (answer in 70-130 words). b. Find the equilibrium by elimination of dominated strategies (answer in 70-130 words). c. Does individual rationality lead to a socially desirable outcome? Why? (answer in 70-130 words)  

Answer 1

The irrational stockpiling behaviour causes more challenges for disaster management, and it exerts adverse impacts on many aspects of the economy, society and local communities.First of all, stockpiling behaviour will deepen the immediate and longer-term impact on retail operations. For some disasters like snowstorms and hurricanes, it is possible for retailers to prepare inventory based on previous experiences and disaster forecast updates . While accurately predicting a black swan crisis exceeds the capability of current science and technology . Given this, the supply chain will be inevitably impacted during disasters, and the disruptions might last for several order cycles depending on the preparedness . The irrational stockpiling will add another level of complexity to the inventory management and exert further tension on the strained supply chain.

Secondly, since irrational stockpiling could instantly empty essential products in stores before restocking, people would have to seek for substituting analogous products in times of chaos. This could have destructive consequences on the infrastructure. In COVID-19 pandemic, it has been reported that the UK and Australia have seen panic-buying of products such as toilet paper, and many people also stock up on similar products like baby nappies and kitchen towels, assuming they could be interchangeable. Warnings have said that this behaviour could have significant impacts and cause extensive damage to the wastewater infrastructure. Sewage systems could readily be blocked with the resulting chaos and increased health risks, while water companies may not have enough equipment to unblock the sewer system .

Third, irrational stockpiling will initialise an improper competing shopping environment which impairs the fair opportunities for accessing essential commodities and leads to a price hike. The aged and disabled people, as well as those working in the essential businesses who cannot go shopping in average time, will be severely affected during the panic buying chaos. Besides in physical stores, the pressure is also mounting online too, with deferred orders and long waited delivery slots and other technical difficulties . As retail stocks dwindle, the lower-priced essential products will be sold out quickly; consumers who come late will have to take higher-priced alternatives. Retailers can also increase prices as a means for mitigating panic stockpiling, and consequently, customers will have to pay more than they used to.

Last but not least, the adverse impacts of irrational stockpiling on households and local communities should not be ignored. As long as the stock scarcity situation remains, people might have to spend more time on shopping, visit more stores and travel more distance in order to fill their demand. This would expose them to more health risks unnecessarily and make people dispirited and frustrated. The outcome of the irrational stockpiling might be optimal and attractive for individual stockpiler, but it is certainly far from maximising the overall benefits and prosperities of the entire community.