Managing Panic Buying with Bayesian Persuasion

Abstract

Problem definition: We consider the information design and inventory management problem in the con- text of panic buying under supply chain disruption risk. Methodology: We utilize the Bayesian persuasion framework to analyze how a profit-maximizing retailer or a welfare-maximizing social planner can use information to strategically influence consumer behaviors. We also study the joint optimization of information design and inventory control. Results: We characterize the consumers’ strategic purchase decisions and identify the underlying factors driving panic buying behaviors. Based on that, we derive the optimal signaling mechanisms for the retailers and the social planners. We show that when faced with exogenous inventory order quantities, retailers employ strategic signaling to mitigate panic buying in high disruption risk scenarios, resulting in mutual benefits for both the retailer and consumers. Conversely, in low disruption risk scenarios, the retailer may induce panic buying to shift some of the holding costs onto consumers. Furthermore, we conduct a comprehensive analysis on jointly optimizing the endogenous inventory ordering decision and information design. We also derive optimal strategies for the welfare-maximizing social planner. We find that compared to the retailer, the social planner tends to order more inventory and allocate a greater portion of the holding costs to the retailer, which may enhance customers’ utility by more than 20%. We show that our results hold even when considering scenarios with general valuation distributions and imperfect private information, highlighting the robustness and applicability of our insights. Managerial Implications: Our research provides valuable insights into the underlying factors driving panic buying behaviors. Moreover, it offers practical guidance to retailers and social planners on effectively managing information disclosure and inventory when facing supply chain disruption risks.

Keywords: Bayesian persuasion, panic buying, supply disruption, information design, inventory decision