Stock ups, Stockouts, and the Role for Strategic Reserves

40 Pages Posted: 1 Jul 2023

See all articles by Brett Green

Brett Green

Washington University in St. Louis - John M. Olin Business School

Cyrus Mevorach

Washington University in St. Louis - John M. Olin Business School

Curtis R. Taylor

Duke University - Department of Economics

Date Written: June 26, 2023

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

Suggested Citation

Green, Brett and Mevorach, Cyrus and Taylor, Curtis R., Stock ups, Stockouts, and the Role for Strategic Reserves (June 26, 2023). Olin Business School Center for Finance & Accounting Research Paper No. 2023/06, Available at SSRN: https://ssrn.com/abstract=4491921 or http://dx.doi.org/10.2139/ssrn.4491921

Brett Green (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Cyrus Mevorach

Washington University in St. Louis - John M. Olin Business School

Curtis R. Taylor

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1827 (Phone)
919-684-8974 (Fax)

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