Panic buying – is it rational or irrational
Panic buying is a situation where consumers buy an unusually large quantity of a good in anticipation of coming uncertainty. A related concept is ‘surge buying’ where people buy more than usual for rational reasons.
Reasons for panic buying could include
- Health crisis which causes people to stock up on health care products, e.g. face masks, Covid 2020.
- Fears over supply chain shortages, e.g. during Covid lockdowns there was an increase in buying of staple items like toilet paper and dried pasta.
- Anticipation of rising prices.
- Reports of empty shelves/empty gas pumps. The recent experience of UK where reports of some petrol shortages, caused a surge in buying of petrol – causing more shortages and encouraging more to panic buy.
- Supply chains reliant on just in time management. This means that if demand increases above the average level, supplies cannot easily respond (inelastic in short-term). If people know supply is inelastic, then it encourages panic buying
- Exaggeration of shortages. If a petrol station is fully functioning, it is not newsworthy. If just a few petrol stations (e.g. q%) run out of petrol, then images of these empty petrol stations may give a falsely misleading impression that the whole country is at a risk of shortage. Because there is a fear of running out, people will respond by buying more – creating a self-fulfilling prophecy of more petrol stations running out. Even if you know only 1% are affected, you may correctly predict that the important thing is how other people will respond
- “No need to panic buy” When politicians say there is ‘no need to panic buy’ – it often has the reverse psychology of making people think there must be a crisis if a politician is trying to manage the situation.
Supply and demand diagram showing impact of panic buying when supply is inelastic
Is panic buying rational or irrational behaviour?
Some panic buying could be seen to be irrational. For example, in response to Covid crisis, some people responded by buying enough toilet paper for several weeks. You could argue this is irrational if the disruption is expected to last several days, but individuals buy enough to last several months.
However, from an individual perspective, panic buying could still be a rational response. The sight of empty shelves in supermarkets may create great anxiety. Buying a large quantity gives the consumer peace of mind and is a way for them to psychologically deal with the image of empty shelves. Also, with non-perishable goods like toilet paper and dried pasta, they should be able to use over the coming months, so there is a very limited financial cost.
Panic buying petrol
If shortages of petrol are reported, then a rational response of a consumer may well be to join the queue and get petrol before it becomes unavailable. A rational consumer will predict that reports of shortages will encourage other consumers to go out and buy petrol and therefore the shortages may become more acute over time. If they wait a few days, then they may use up all their available petrol but then the petrol stations will be empty and they can’t refill. The consumer then has the very high cost of not being able to get to work/travel.
Buying petrol early imposes relatively low costs (the main cost may be the time of queuing up) but there is no financial cost of filling up a tank because you are definitely going to use it. But, importantly buying early avoids the potentially very high cost of being at the back of the queue and missing out. Plus when you have a full tank, it reduces the mental anxiety of not knowing if you will be able to buy petrol. If you have a full tank, you can be quietly pleased that you are not the anxious person queuing up for petrol
Irrational panic buying
You could argue there are cases when panic buying petrol is irrational. For example, suppose you are a relatively modest user and have enough petrol to last a few weeks. If there is no real shortage, but just the issue of surge buying and supply issues, then the crisis is likely to last only a few days. In this case, it is more rational to not queue up but when for normality to return. However, if you panic at the sight of others queuing, you may waste time in a queue you don’t need to be in – just because you are basing your behaviour on what others are doing – not what is in your best interest.
In this case, you could argue it is irrational to spend 20 minutes in a queue when you don’t need petrol for several days. It is better to wait, let the temporary crisis pass and then buy when the panic and queues are over.
From one perspective you could argue that every action a consumer takes is rational because they are doing what they think is best. If you worry about shortages, queuing up to buy petrol gets rid of that mental anxiety. Spending 20 minutes in a queue is better than worrying all day long about not having petrol. You can’t say what is rational – it depends on how the individual deals with uncertainty.
However, another consumer may feel it is important to understand the market and type of shortage. If you believe there is a normal supply of petrol, then the panic buying reported in the press is unlikely to last. This consumer may weigh up the probability of how long the petrol crisis will last. Then they can take a decision on whether the costs of queuing up for petrol are worth the likelihood you will actually run out of petrol before you can get it.
Selfish vs selflessness
A valid criticism of economics is that it emphasises what is in an individual’s rational self-interest. However, this encourages a selfish society, which is incapable of altruism and considering the wider community. For example, if you were selfish, you may go to fill up with petrol without thinking of the impact on others. On the other hand, you may think, there are other people who will need petrol more than me, so I will wait – and miss inessential travel if necessary, but ignore the herd behaviour.
When the panic buying of petrol hit the UK 27 September. I was driving to Yorkshire. Fortunately, I had a full tank before I set off. In Yorkshire, I had 330 miles in the tank, but the journey back to Oxford is only 200 miles. When I went past petrol stations, if there had been no or limited queue, I would definitely have filled up. But, there were long queues (or the station was closed) I didn’t want to waste 20 minutes in a queue. So I drove back to Oxford. I now have 100 miles in the tank, but I don’t need to really drive anywhere for a couple of weeks. So I will wait until the queues are back to normal. I got lucky in filling up before I drove. It will slightly change my behaviour for the coming winter. I won’t run the tank to nearly empty like I usually do. It is good to have that buffer and avoid the risk of desperately needing petrol. I’m sure everyone else will think along similar lines