Question

Discuss how panic buying (i.e., what we saw occur with hand sanitizer and toilet paper during the early days of the COVID-19 pandemic) can be explained as rational behavior in the context of game theory.

Answer 1

Answer: During the early days of the COVID-19 pandemic there was a sudden rise in demand for personal hygiene items, namely, sanitizers, hand wash, soaps, and tissue papers worldwide. The panic buying is rational and considered to be example of Nash equilibrium, named after John Nash, Nobel-winning economist, in the context of game theory.

In the game there are two players - the shopper and everyone else; and two strategies - panic buying or non-panic buying. When without panicking people are buying, equilibrium can be reached and supplies would remain normal with no shortages. But when people indulge in panic buying then for the shopper the optimal strategy would be to do so also by avoiding the missing out on hand sanitizers. Thus in the game the likely outcome will be the second equilibrium where the people indulges in panic buying, and results to the shortage.