Panic Buying: A Simple Analysis Using Game Theory
In class, we were introduced to the notion of game theory, which studies the way “players” make strategic choices and the resulting outcomes of those choices. Following these lectures, I was very intrigued to see how game theory could be applied to our real life other than actual games. After reading multiple articles, the one I found to be the most interesting was “Fear is the key and panic buying is the therapy” by Puja Mehra. She goes onto explain how the toilet paper shortage induced at the beginning of the Covid-19 pandemic can be explained by simple game theory. You can imagine two players: you and everyone else. The payoffs and strategies are pictured below:
While panic buying may seem irrational at first, breaking it down into a simple game makes the motivation more clear. As you can see, there are two Nash equilibrium present in this game: both “players” shop normally or both “players” panic buy. Ideally, everyone would shop normally. This way, everybody would have supplies and there would be no shortages. However, if other shoppers are to panic buy, the best decision you can make for yourself is to do the same. Since fear of being without resources overshadows the logic of continuing to buy normally, a lot of shoppers are inclined to panic buy. This causes shortages and an increase in panic. Mehra goes on to explain how the best way panic buying can be kept in check is by placing caps on the amount consumers can purchase. This prevents any individual from consuming more of a good than they actually need.
This dilemma is very reminiscent of what we learned in class. The entire toilet paper “pandemic” can be explained by modeling a simple game, far less complex than some of which we looked at in lecture. The potential strategies and outcomes can be represented in a matrix and finding the best responses can be done by identifying Nash equilibrium. I think this article was a good demonstration of the shortcomings of modeling situations like this with a simple strategy matrix. For example, from this matrix, you cannot tell that both “players” panic buying will cause shortages and greater issues. This would probably take more complex knowledge to model and motivates me to further learn about game theory and modeling economic situations.
Source: https://www.livemint.com/news/india/fear-is-the-key-and-panic-buying-is-the-therapy-11583946988380.html