Scarcity and Hoarding: Economic and Social Explanations and Marketing Implications

Citation:

Ronald Stiff, Keith Johnson, and Khairy Ahmed Tourk (1975) ,"Scarcity and Hoarding: Economic and Social Explanations and Marketing Implications", in NA - Advances in Consumer Research Volume 02, eds. Mary Jane Schlinger, Ann Abor, MI : Association for Consumer Research, Pages: 203-216.

Advances in Consumer Research Volume 2, 1975      Pages 203-216

SCARCITY AND HOARDING: ECONOMIC AND SOCIAL EXPLANATIONS AND MARKETING IMPLICATIONS

Ronald Stiff, Illinois Institute of Technology

Keith Johnson, Illinois Institute of Technology

Khairy Ahmed Tourk, Illinois Institute of Technology

It seems unusual to experience hoarding in modern society, yet a number of products have been hoarded in 1974. Scarcity alone is insufficient to explain these hoards. Social and economic theories provide explanations for hoarding demonstrating its occurrence under specialized conditions not always requiring scarcity. Scarcity is but one of many signals available to consumers as an encouragement to hoard. In addition to retail availability hoarding is influenced by signals including price, formal and informal communications interacting with preconditions including consumer experiences and expectations. Theories of hoarding lead to marketing implications involving distributions, pricing, advertising and public relations decisions. It is concluded that if hoarding continues to exist in modern society the resultant secondary effects will both encourage and permit the development of empirically based theories of hoarding.

Consumers and managers in industrialized countries have come to expect that there will seldom be a scarcity of any goods during stable economic times. Although shortages may be expected for newly introduced products, shortages for most products are contrary to consumer and management expectation. Yet, in early 1974 shortages seemed to be epidemic. The news of shortages spread rapidly, aided by mass media sources which cited shortages in gasoline, toilet papers toilet seats, toilets, paper bags, yellow tennis balls, anti-freeze and tomato paste: the latter attributed to an enormous increase in the taste for pizza in Japan (Hollie, 1974; Malcolm, 1974; Business Week, 1974). This atmosphere of scarcity has led to reports in the press of hoarding by consumers such as runs on toilet paper, "panic buying" of gasoline and in some cases stock-outs of products.

Hoarding in an affluent society has received only limited attention by behavioral scientists and has been of little interest to most marketers. Hoards in affluent societies have generally taken the form of collections such as art, oriental rugs, precious metals (including coins), currency (which may include stamps), and jewels. These hoards are of a different nature than current hoards of low priced consumer products. Collections are based on assumptions of long term scarcity of the collected goods, which are often of high intrinsic value and may replace other investments or currency during times of financial stress or war, while hoards of low priced consumer goods are based on expectations of short run instability of supply. Current hoards are affecting a larger number of consumers and producers than collections, which we will not consider.

THE CONCEPT OF HOARDING

[This paper emphasizes the hoarding of products by consumers. Extensions of hoarding concepts and theory to both organizations and the purchase of services could be useful. Useful results might follow if services are considered as hoards in time or spatial dimensions rather than in inventory dimensions, (for example, being the first to see a new movie, going to Yellowstone park while it exists in its present state, or "excessive" preventive medical examinations).]

Hoarding exists when the consumer's current inventory of an item exceeds his inventory in previous periods while his expected consumption rate (taste) remains constant. This definition is operational for both consumers and organizations at both individual (micro) and group (macro) levels. The degree of hoarding can be represented as the ratio of current inventory to previous inventories. Hoarding also exists when the consumer's expected consumption rate is changing. This condition is more difficult to measure since changes in consumer inventory must be controlled for changes in expected consumption. Wartime hoarding often follows this pattern as the consumer seeks to both increase his inventory and decrease his consumption to make more effective use of stocks which he expects to decline.

The relationship between hoarding and the expected consumption is influenced by consumer expectations of the duration of shortages. If the consumer expects shortages to be short-run he may hoard without adjusting his consumption; however, expected long-run shortages are likely to lead to declines in expected consumption. These relationships suggest an outline for a theory of hoarding in which consumer preconditions, including expected consumption and expectation of shortages, lead to hoarding and hoarding produces secondary effects including changes in seller inventory (supply) and expected consumption. These secondary effects may amplify or dampen hoarding. For example, a visible decrease in available supply may amplify hoarding while a decrease in expected consumption may dampen hoarding.

Signals, such as visible supply, interact with consumer preconditions to produce hoarding. Economists consider price and total supply as signals influencing hoarding, while sociologists place greater stress on mass media and inter-personal communications and the consumer's direct observation of both retail availability and the purchase behavior of other consumers. A number of these signals are under the control of marketing managers, including advertising, price, and to some extent retail availability.

An outline for a theory of hoarding is shown in Figure 1. In this theory scarcity is only one of several possible signals leading to hoarding. The relationship between hoarding and scarcity is complex. First, hoards can exist without scarcity which apparently was the condition which existed for toilet paper in many parts of the United States in early 1974. Second, hoarding may lead to scarcity which allegedly was the condition for gasoline; the United States Federal Energy Office estimated that "rolling hoards" of gasoline were created by motorists who topped off their tanks, accounting for as much as a four day supply of gasoline nationally (Ingersoll, 1974). Finally, scarcity may lead to hoarding which is a condition that arises frequently during wartime and following natural disasters but may not have occurred yet in modern industrial society (Anatoli, 1971 and Salisbury, 1969).

FIGURE 1

OUTLINE OF A THEORY OF HOARDING

ECONOMIC EXPLANATION OF HOARDING

Hoarding by consumers takes place in goods that have inelastic demand and low income elasticities. Total spending on these goods tends to be relatively small compared to total consumption expenditures. Hoarded goods generally have few substitutes and are relatively easy to store. For consumer hoarding to take place, two conditions should be satisfied. The first condition can be explained within a two-period framework. The motive to hoard in period t the goods that are normally purchased in period t+1 depends on comparing two types of costs:

First: the cost of acquiring t+1 goods in period t (i.e., "present" cost) and

Secondly: the cost of purchasing t+1 goods in period t+1 (i.e.. "future" cost).

A necessary condition for hoarding is that the "present" cost is less than the "future" cost. [A proper rate of discount is implicitly assumed here. This rate would allow direct comparison between "present" and "future" costs.]

The "present" cost does not include only the cost of buying the goods but also the cost of storing them and the cost of the tied-up funds. This type of cost could be called the objective cost. The reason for this is that the consumers generally know the interest foregone (if they use their own money to buy the goods), the present price of goods and their storage costs.

On the other hand, the "future" cost depends on the expected price of goods. Different consumers could have different expectations concerning future prices. This makes the "future" cost a subjective cost. In calculating the future costs, the individual consumer is influenced by market and non-market signals. The consumer also takes into consideration the distinct probability that the hoarded good might eventually disappear from the traditional marketplace. Such an eventuality might give rise to the development of a black market. The extra cost of search and information associated with the black market should be considered as a Part of the "future" cost.

The second condition for consumer's hoarding is that it is primarily motivated by a desire to secure his own supplies of the hoarded good rather than making financial gain. This last condition is what makes hoarding different than speculation. As with speculation it is true that hoarding provides a means of hedging against future price fluctuations and the individual consumer gains or loses depending on whether his expectations turned out to be correct or not. With hoarding, however, the change in the consumer's financial status is secondary to his primary objective of securing an adequate supply of the hoarded good for his own personal consumption.

Secondary economic effects result from hoarding. Hoarding is an increase in demand. In the short-run with supply fixed, the price of the hoarded good would increase. This price increase does not necessarily mean that a real scarcity problem exists in the long-run. In the long-run situation, the direction of price change is dependent on the supply conditions and the consumer's evaluation of these conditions.

The price of the hoarded good would decrease if the producers reacted to the increase in demand by increasing the supply of the good. The longer the time period under consideration and the higher the mobility of the inputs used to produce the good in question, the higher would be the elasticity of supply and the lower would be the increase in price in the long-run. The increase in the quantity supplied might also cause the consumers to revise their previous expectations concerning the hoarded good. A decision on their part to hoard less or to stop hoarding would reduce demand bringing prices down even further.

On the other hand, if the long-run elasticity of supply was low or zero, then the degree of hoarding might intensify causing demand to increase. With every increase-in demand, the price of the hoarded good would continue rising producing inflation. For consumers living on relatively fixed incomes, inflation produces a reduction in their standard of living reducing their share of the income distribution. This effect is most severe when the hoarded good represents a significant part of the consumers income, especially among the poor.

The above conclusion is not necessarily universal. One could think of a case where goods were hoarded by the poor groups in the society. This is particularly true if poor people have more time at hand to invest in restructuring their purchasing behavior relative to hoarded goods. In this case if the rich are forced to pay a higher price for the same goods then, other things equal, a change in income distribution would take place in favor of the poor. [For example the poor may be more willing to spend greater travel time on public transportation and avoid the effects of hoarding and shortages of automotive products.] This, however, can be counteracted by the fact the rich are more willing to pay higher prices, have access to more information and more storage space to hoard the goods than the poor. If the shortage of goods continued, there would be widening of the income gap between the rich and the poor in favor of the first. The outcome is a definite deterioration in the poor's standard of living. To deal with the problem a rationing system might be in order.

SOCIAL EXPLANATION OF HOARDING

Studies of social behavior show that people respond to information (signals), but signals themselves are not sufficient.to induce behavior. Without necessary preconditions, even a strong signal will be ignored or reinterpreted, while a weak or ambiguous stimulus will be interpreted as a desired (or feared) signal with the necessary preconditions.

Studies showing the interaction of signals and preconditions include the 1938 War of the Worlds radio broadcast, in which music was interrupted by "news" bulletins stating that New Jersey had been invaded, "false" or spurious sounding of Civil Defense sirens in the 1950s, and a Texas fireworks factory explosion followed by a huge, dreaded mushroom cloud over the area. Preconditions at the time of these signals led to substantial collective behavior which would be unlikely today.

When a signal strongly indicates action and people have preconditioned expectations such as the possibility of life on Mars or enemy attack their response is to seek supporting evidence. (Baker and Chapman 1962). The War of the Worlds broadcast led to a large increase in telephone usage as did the false Civil Defense alerts. Frequent responses to these events included turning to others (coworkers, family, etc.), looking out the window for signs of anything unusual, turning on the radio and telephoning for information.

Often the search for new evidence leads to selective perception and interpretation. Some selectively interpret everyday conditions as frightening, as when traffic patterns lead some War of the Worlds listeners to believe in an "invasion" of New Jersey. Fewer cars than usual led one on-looker to suppose that people were in hiding or killed, while more cars led another to believe people were fleeing the "invasion."

The search for evidence can be effective in changing the information usually available to the individual. A signal may be simultaneous for many people, so when an abnormally large number of people pick up their telephone they find the lines gone dead, busy signals, or crossed lines - each leading to further fear and/or belief in the signal.

If small events have gone unnoticed, a signal may cause heightened awareness and receptivity for information previously ignored. An "epidemic" of auto windshield pitting has been traced to a newspaper article describing unusual pitting of a few windshields whereupon hundreds of motorists suddenly "discovered" they also had small defects in their windshields. Presumably, these defects had gone unnoticed for months or years in most cases.

In general, people are unlikely to engage in unusual behavior unless they have become sensitive to circumstances leading to that behavior, and expect the conditions surrounding it. Panic (flight) does not occur in natural disasters, false air raid warnings, wartime, or other similar situations unless participants believe specific conditions are present requiring flight. These conditions consist of imminent danger, a belief that escape is possible, and a belief that chances of escape are steadily diminishing when present. These conditions lead to such events as runs on banks, stock market drops and theater panic with people pushing and shoving to escape (and endangering those unfortunate enough to fall or be crushed against an obstacle).

We can generalize from these studies of social behavior to the less understood area of hoarding. Hoarding appears to be a form of behavior which follows the pattern "panic" (avoiding a danger or threat), but the component of escape is replaced by a positive seeking of goods. A "buying panic" could partly resemble the run on the bank or "gold" rush.

For people expecting a normal, plentiful supply of goods, hoarding is unthinkable. Signals of an impending scarcity of goods alone do not induce hoarding. We suggest that the experience of being caught short is the chief pre-condition to consumer awareness of shortages. Further the objective costs of having run short, its dramatic qualities and its subjective interpretation by the consumer lead to generalized awareness of shortages which influence future busing decisions.

The direct costs of running short include:

1) expenses and time consumed in search for short goods in traditional and black markets

2) added costs required in seeking a substitute; and

3) inconvenience caused by absence of short goods and inadequacy of its substitute.

The dramatic qualities of the experience of running short are a product of the salience of the good and the visibility of its shortages for the consumer.

The visibility of a product shortage is dramatically portrayed in businesses abandoned due to lack of supply, long waiting lines, social discussions with others about a shortage, and to varying extents, in the actual absence of goods.

Finally the consumer may assign the responsibility for a shortage to himself, to other consumers, or to powerful agents (government, manufacturers, or suppliers). If he accepts the blame (in not purchasing enough personal inventory), the consumer is more likely to hoard and be sensitive to future signals of on-coming shortages than if he blamed other consumers (who caused the shortage by hoarding).

Blaming official agents may increase a consumer's tendency to hoard, but it will also increase his suspicions of signals coming from such agencies. [Blaming other consumers would seem to lead to consumer support for rationing, blaming self to hoarding, and blaming powerful officials to legal controls - even nationalization of producers.]

By all these factors American consumers received an experience likely to change their orientation towards goods from the shortages of gasoline last Winter.

The general unavailability of gasoline was accompanied by large increase in price, long waiting lines, (which paradoxically caused much gas to be wasted), closed stations, foregone vacation trips and unused vacation homes, and anxious moments concerning the family car, which involves the greatest household investment after the home.

The widespread reporting of shortages of various consumer products, frequently accompanied by a rush to buy in 1974 can be interpreted to be due to a large extent to consumer preconditioning by the 1973-74 gasoline shortage, combined with signals for individual products.

The bizarre social behavior in relation to consumption in 1974 (anger, hoarding, panic buying) must be understood as due to abnormal social conditions. Consumer expectations of abundance were shaken by experience with shortages. If products return to abundance, expectations will return to normal. Expectations may also normalize if the availability of products stabilizes at levels of intermittent scarcity, or even chronic scarcity, as in conditions of famine or war, although these expectations will be quite different from those of plentiful supply and may include hoarding as a matter of course.

It is the period of uncertainty (transition) from one condition to another which has extreme forms of reaction. One type of reaction (hoarding) may become normal in relation to goods in short supply while when it appeared in 1974 hoarding frequently seemed bizarre.

The role of signals has also undergone a period of uncertainty and misinterpretation for years. When consumers have become sensitive (preconditioned) to scarcity, they will read statements different from their interpretation during times of abundance. An official who pleads with consumers to stop panic buying will actually spread news of a shortage and cause increased buying. The message "There is no shortage of" will be interpreted "I didn't realize there is a developing shortage of" and "adequate supplies of - are on the way" will mean "there are problems in supplying.

In short the social explanation of hoarding is based upon the precondition of scarcity in the experience of the consumer. When scarcity is believed present, signals will be perceived (perhaps in error) that the supply of a good is uncertain and a rush to gain protection will tend to follow. Erratic hoarding behavior will accompany conditions of general uncertainty of the supply of good. while predictable scarcity will cause more stable hoarding. Economic and social factors are shown in figure 2.

FIGURE 2

A THEORY OF HOARDING

MARKETING IMPLICATIONS

These explanations suggest both threats and opportunities for marketing managers. The results of hoarding tend to create relatively uncontrollable market dynamics requiring both defensive and offensive marketing strategies.

Market Dynamics

Once a product leaves a manufacturer it may be inventoried at the wholesale, retail, or consumer level. Hoarding acts to increase the consumer proportion of this inventory. For many products consumers have greater collective inventory space and purchasing power for a product than retailers and wholesalers combined. Thus for these products a relatively modest increase in consumer purchase rates may lead to little or no retail availability of a product or brand within a market area. As the consumer observes decreases in retail availability for a product or brand he will under appropriate preconditions view this as an early signal of shortages and increase his purchasing rate increasing the problem of retail availability. As individual brands of products stock-out the consumer is forced to either switch brands, switch retail locations, purchase a substitute product whenever possible, or to decrease his consumption of the product.

Ehrenberg (1972) has demonstrated that repeat buying for many nondurable products including breakfast cereals, coffee, gasoline, and toilet paper follow predictable statistical distribution. He proposes that this model is effective in predicting repeat buying except when there are "real differences in product-formulation, or price, or retail availability." Hence brands subject to stock-outs would not follow his theory of repeat buying and would be expected to lose market share position since brand loyalty would be threatened. Hoarding, therefore, may result in changes in market shares

Ehrenberg, however, also proposes that when brand loyalty is very strong the consumer will revise his retail shop loyalty and seek other sources for the brand. Thus the retailer is likely to lose a part of his retail market share as consumers learn new shopping strategies. This may have happened for the purchase of gasoline in 1974.

An alternative to brand switching or retail shop switching is to seek out a substitute product. Thus those unable to purchase gasoline may switch to public transportation, those needing tomato paste may develop a taste for frozen pizza, cloth napkins may be substituted for paper napkins, and shortage of toilet paper may increase the demand for mail-order catalogues. As a result of the consumer learning to use substitutes, the demand for a product is likely to decrease, perhaps approaching zero. Thus we have the strange condition of a rapidly increasing demand (the hoard) leading to a shortage with resultant decreased demand for the product as demand for the substitute product increases.

If the consumer believes the supply of a product is seriously threatened he is likely to take steps to reduce his consumption of the product. This behavior as with product substitution leads to a long-run decrease in demand for the product. Hence, some persons who decreased their pleasure driving in current months may never return to this activity at their previous level. New modes of recreation, such as do-it-yourself activities may replace the threatened activity.

Marketing Strategies

Marketing strategies which can be used to discourage hoarding or diminish the effects of hoarding on the organization's profits involve distribution, price, and advertising decisions.

Distribution strategies. It is likely that the first knowledge a marketer will have of hoarding by the consumer is the rapid decrease of retail inventory in some geographic areas. Since decrease in retail availability of brands and products are a signal increasing the likelihood of hoarding the marketer may be able to avoid stock-outs if he can move more of his product into the hoarding areas. If marketers cannot do this consumer feared shortages may well become a self-fulfilling prophecy as increasing consumer inventories exhaust wholesaler and retailer inventories. Whenever the marketer stocks-out in an area it is likely that he will either lose market share or force some of his retailers to lose retail market share.

This latter problem suggests a strategy for retailers. Retailers should be aware of products and brands that are likely to lead to changes in retail loyalty in the sent of a stock-out. Inventory policy should place emphasis on control of these items. Shoppers can be polled as they check out to determine shortages, threats to retail loyalty, and hoarding. "Rain checks" can be given to encourage a wait and return attitude. At the same time retailers should place greater emphasis on services which encourage consumer loyalty. Thus gasoline service stations maintaining services such as washing windows and checking oil during gasoline shortages are likely to develop strong long run retail loyalty.

The success of distribution strategies are based on the ability to predict hoarding in time to reallocate supplies of the product. The short-run costs of reallocating supplies in the distribution system to cope with hoarding must be balanced against the potential long-run costs of stock-outs and for more fundamental financial reasons there is a great desirability of reducing distribution lead times.

Price strategies. We cannot think of any justification for decreasing prices in the face of hoarding; however, it is not clear when prices should be increased. It is generally assumed that increases in price will decrease demand. Once hoarding has begun an increase in price may be interpreted by consumers as a signal of future shortages and of future higher prices. Thus price increases may increase demand. A company is likely to increase its short-run profits by raising prices during hoarding, but a more realistic strategy is to use price as an instrument for maintaining retail inventory in order to minimize brand switching. The optimum strategy for a single company may be to meet competitor's price increases with slightly higher increases;however, this may trigger increased hoarding and retail shortages for many companies. Actual consumer behavior under these conditions of supply and pricing has not been reported.

Advertising and public relations strategies. Advertising Age (1974) has suggested "that in the future, when a rumor touches off doubt and panic, those advertisers whose products are involved must rush in with advertising - individually or collectively - to carefully advise the public of the true situation. Fast authoritative action on the part of advertisers and news media can head off trouble. To let rumor run rampart and do nothing to counter it is irresponsible." This strategy is likely to be counterproductive as a signal to consumers when consumer preconditions for hoarding exist. Counter-advertising may be viewed at worst as a signal of shortages to come or at best create additional interest in the product and heightened interest in observing retail availability. We are not convinced that any advertising will act to decrease demand except perhaps, that communicating negative characteristics of the product itself. We have too little experience with hoarding to know the influence of counter-advertising on the demand function, but it seems reasonable that positive product advertising should be decreased or eliminated when hoarding preconditions exist to improve organizational performance.

Only a company with extensive product inventory could benefit by extensive advertising. Advertising would increase generic product demand, leading to competitor's stock-outs, produce brand switching, and be likely to increase the short and long-run market share of those companies with available product inventory.

Advertising has been proposed as a perverse strategy as the following examples suggest:

"A widget maker decides that widget sales need a boost. He issues a statement to the effect that there is no widget shortage at present and none is foreseen in the future. It figures that in the absence of additional information, hoarding of widgets can begin and sales boom." (Advertising Age, 1974)

"At least one Chicago store is advertising that there is no shortage of record players, apparently hoping that this will prompt a run on record players." (Malcolm, 1974).

These signals will be ineffective when preconditions for hoarding do not exist. Additionally perverse strategies are more likely to increase short-run profits than long-run consumer confidence in the companies using them.

One strategy seems clear, marketers of substitute products should increase their marketing activities in the face of hoards. Advertising of substitutes should be increased and price changes should be carefully appraised. For example, the Chicago Transit Authority reduced prices by about one-half on Sundays for four weeks and advertised this action heavily during the 1974 "gasoline crisis". Ridership increased substantially although the long-run financial impact is unknown.

The general long-run strategy of a marketer is to reduce the number of signals which lead to hoarding. The most significant of these signals is retail availability. When availability is threatened strategies for price changes are not clear and should be viewed as highly situational. Advertising and price increases for hoarded products may lead to short-run increases in profits; however, longer-run profits are likely to result from a great reduction in advertising and careful consideration of price.

CONCLUSIONS

This paper arises from concern over the current crisis psychology and its mix of preconditions and signals leading to hoarding. If shortages and hoards are a temporary problem then this paper is of temporary value. On the other hand,if future shortage and hoarding occur this paper serves to point out how little we understand consumer behavior underlying hoarding phenomena and the actions marketing management should take. If future hoarding is expected steps should be taken to improve our early warning systems or predictive methodologies. An opinion research corporation has advertised their public opinion poll as an "early warning system" presenting a picture of cars lined up at gas pumps. In addition to polls we could also use measurements of product flow at retail and wholesale levels and content analysis of news reporting as components of early warning methodologies. If hoards become more prevalent prediction methodologies will become more valuable and, of course, easier to test empirically .

Finally we have provided qualitative economic and social explanations of hoarding and subjective marketing strategies. A more quantitative theory of consumer hoarding behavior with more specific strategy decision rules would not be difficult to develop if more hoarding is experienced, thus increasing the demand for such a theory and permitting its testing.

REFERENCES

Advertising Age. Panic mongering and marketing. February 25, 1974, 16.

Anatoli, A. (Kuznetsov) Babi Yar. New York: Farrar, Strauss and Giroux, 1971.

Baker, George W. and Chapman, Dwight W. (Eds.), Man and society in disaster. New York: Basic Books, 1962.

Business Week. Now tomato paste feels the squeeze. February 16, 1974, 50-51.

Ehrenberg, A.S.C. Repeat buying: Theory and applications. New York: American Elsevier, 1972.

Hollie, Pamela G. Here's a timely lesson on supply, demand, paper bags and things. Wall Street Journal. February 3, 1974, l.

Ingersoll, Bruce. FEO aid raps drivers for topping off. Chicago Sun-Times. March 1, 1974, 30.

Malcolm, Andrew H. The shortage of bathroom tissue: A classic study in rumor. New York Times. February 3, 1974, 29.

Salisbury, Harrison E. The 900 days: The siege of Leningrad. New York: Harper and Row, 1969.

Smelser, Neil J. Theory of collective behavior. New York: The Free Press. 1964.

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