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« Dynamic Supply Function Equilibria : Why Rational Panic Purchases Are Not Bank Runs and Why Black Fridays May Be Harmful »

Abstract :
We analyze rational panic purchases in a two-period model that incorporates uncertainty about sellers’ capacity and buyers’ need for the good. Even if sellers have enough capacity to satisfy demand, there may be shortages because consumers panic purchase. We show that panics can only occur if consumers are risk averse or in noncompetitive equilibria. In noncompetitive equilibria, sellers initially price below opportunity cost to induce a panic and achieve higher profits later. Conventional wisdom for various policies may be overturned when it comes to preventing panic purchases : rationing, price caps, information policy, changes of consumption tax, and restrictions on resellers.