scalping is price discovery as intended

Posted by Unspector Blog on Wednesday, December 15, 2021

Why aren’t retailer and producers doing it themselves?

With the current chip shortage and the explosive boom of interest in consumer electronic the phenomenon of scalping is rampant.

Scalping is a two part act: on one side a prospective scalper needs to be able to procure a good in relevant quantities for the intended price before the general public is able to. On the other side the demand needs to be so high that an arbitrage play is profitable.
Considering only basic economics scalping shouldn’t be possible (at least not for a sustained amount of time): if demand for a good is higher than its supply at the current price, the producer themselves or at least the downstream retailers will raise prices. This in turn should lower demand, until supply and demand are in equilibrium again.

The time, which is needed to discover the discrepancy between supply and the current price forms elasticity for scalpers to reap arbitrage, though after the price is raised and the stock of cheaper goods the scalper may have amassed is depleted, no further arbitrage exists and scalping becomes unprofitable.

So what is the real price of a PlayStation 5 (possibly the most sought after consumer good in the world right now, over a year after its official release)? According to SONY - the producer - 499 EUR. According to retailers, close to 499 EUR, if the PS5 would be offered alone. But retailers are often bundling video game hardware with subsidized games and accessory. The price difference between a three-part bundle and the hardware itself will still be more profitable for retailers than the barebones console. And when demand is high, there isn’t really a reason to offer the less profitable console alone, when consumers are willing to buy the more profitable bundle as a substitute. Therefore the real price of a PS5 from legitimate retailers may be closer to 600 EUR or even 650 EUR, bundled with a game and a controller.

But if we take a look at offers on eBay and other marketplaces the price some consumers are willing to pay is much closer to 700 EUR or even 1.000 EUR. Additionally consumers are unable to buy any console - bundled or not - from reputable retailers for sustained periods of time. This fuels anger: while SONY advertises the PS5 as 499 EUR, nobody is easily able to buy a PS5 at that price, without luck or a heavy investment of time and effort.

To understand, why SONY doesn’t raise prices we need to look at the bigger picture: efficient market hypothesis seems to be violated and SONY’s interests aren’t served, when selling a good for 499 EUR, which could fetch 1.000 EUR at current demand. Though SONY is part of a larger battle over the hearts and minds of consumers: SONY cannot by itself admit, that PS5 prices are higher than intended, that would put the PS5 at odds with SONY’s biggest rival, Microsoft’s Xbox. If SONY would be the only producer to admit, that equilibrium prices are much higher, than advertised, this will encourage some prospective customers to buy a substitute, most possibly an Xbox. Therefore SONY (and inversely Microsoft) is stuck between a rock and a hard place: Selling consoles to retailers, which in turn bundle them, turn around and dump them on scalpers, which are having a field day, ripping of customers and subsequently angering consumers? Or raising prices to a fair level and losing customers not only short term, but possibly until the next console generation comes around in seven to ten years?

Which leads to the second part of this discussion: efficient market hypothesis is not really violated, since the real price for this good is raised - just not by the producers. At the same time the long term price of a good is equal to its cost and this is, why SONY can be rather sure, that Microsoft won’t raise prices either: Both of them calculated long before the chip shortage started at which price they will make money and still be attractive for consumers and both set the price long in advance. This itensifies the stalemate: Neither can raise prices, because the other simply mustn’t and neither can stop scalpers because of that.

While this dynamic seems inconsequential for non-essential consumer goods, it gets more complicated when considering the economy at large: When the real price for a PS5 is up to 1.000 EUR, while the advertised price is 499 EUR and the supply crunch still sustains, consumer electronics just devalued the underlying currency nearly by a half in “PlayStation equivalent”.

Sustained supply crunches drive inflation and especially companies selling at or below production costs in anticipation of economies of scale at a later time fuel a race to the bottom in their respective industry, which makes it impossible to resolve supply crunches in an efficient way.

When this particular issue passes - which I am hopeful it will - we should reconsider if consumer electronics and other expensive fashion pieces like luxury cars or designer clothing should have such a short lifespan. Feeling the need to have the new video game console, the new smartphone or the new car in the first moment of its lifecycle, since its perceived value is used up so fast and projecting this need through shame and envy onto others is a driving factor, why producers and retailers cannot adjust prices accordingly.
It is not often, that I am advocating for individual responsibility (neither finance nor energy nor climate crises can be realistically resolved through individual actions), but the supply crunch - and subsequently demand crunch - non-essential consumer electronics experience at the moment would vanish, if enough people chose to re-evaluate if their current smartphone, PlayStation or car may still hold enough value to use - even if a newer one exists.