Panics and prices

Rumors of a shortage may create higher-order uncertainty and cause panic buying even when there is no real shortage and most consumers are aware of this fact. We study the role of prices in alleviating, or even preventing, panic buying caused by such rumors. Under some circumstances, flexible prices fail to do so and panic buying is the unique equilibrium outcome. In our model consumers do not know their future tastes perfectly and panic buying reduces welfare because consumers now buy with only imperfect information about tastes. In these circumstances, a minimum support price—a price floor—prevents panic buying and leads to higher consumer surplus. Producer surplus may be higher as well.