Stock ups, Stockouts, and the Role for Strategic Reserves

Abstract

The global supply chain has recently experienced several high-profile and econom- ically significant disruptions, often prompting consumers to stockpile in anticipation of shortages and price increases. In this paper, we explore how consumer stockpiling interacts with dynamic monopoly pricing and inventory management during a supply disruption. We show that a monopolist, unable to price discriminate, holds too little buffer stock and raises prices earlier than is socially optimal. Consumer stockpiling introduces another distortion, endogenous uncertainty over the timing of a price hike arising from preemption incentives. We evaluate government interventions and find that a strategic reserve policy can always achieve the socially optimal allocation, whereas price controls and rationing cannot.

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

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