Stock ups, Stockouts, and the Role for Strategic Reserves

Abstract

At the height of the Covid-19 pandemic, consumers stockpiled common household items in expectation of shortages and rising prices. In this paper, we explore the interaction of consumer stockpiling with monopoly pricing in the face of a supply disruption. If consumers can store the good, they purchase stockpiles in anticipation of a price hike. This causes the firm to raise the price sooner in expectation and erodes profit. Consumers are better off (worse off) than in a world without consumer stockpiles if their storage costs are lower (higher) than a critical level. Social welfare, however, is often lower when consumers can stockpile. We explore potential remedies to resolve the distortions, including rationing, price controls, and strategic reserves. Despite conflicting objectives between the firm and the government, there exists a government strategic reserve policy that achieves the social optimum.

Keywords: Dynamic Pricing, Supply Disruptions, Strategic Stockpiling, Inventory Management

JEL Classification: D42, C73, D92, L12, L50