Inert Detritus The Internet's dust bunnies

Posted
22 December 2006 @ 1am

Economics Meets the Street

Both the PS3 and the Wii have been exceedingly difficult to purchase this holiday season. Sales of both seasons have been, as far as I can tell, entirely supply driven.

Supply driven situations are interesting and typically rare for goods in the economy. Typically, these goods are new to the market, and the producing firms are unable to ramp production up as quickly as market demand would dictate.

In the United States, prices on supply driven goods are not floated like they should be. Firms stick to a strict pricing scheme, relying instead on third parties as arbitrageurs to equalize supply and demand.

Supply driven situations, such as a very limited supply of a high-value good such as a gaming system, are perfect arbitrage opportunities. People who value their time cheaply, such as students, are willing to wait in line to buy a PS3 or Wii. They then post their system to an open market like eBay, where people who valued their time too much to wait in line can buy a unit with markup that the seller determines.

This “intermediary” helps to reconcile the supply and demand differences that exist at an artificially low price, such as $250 per Wii. At $250 bucks, assume 100,000 people would go and buy a system. However, there’s only 20,000 systems available. Some people are willing to “pay” in the form of waiting for a system. These people buy the 20,000 systems, and resell them at a much higher value. Usually, this “higher value” will stabilize near the price at which only 20,000 people would want to buy the system.

Why is arbitrage “bad”? From an economic point of view, arbitrage is actually good, because it helps to equalize markets in an efficient manner. People can either spend their time, in the form of waiting in line, or their money, in the form of more expensive auctions on eBay, to acquire a rare good. Because the units are available for sale in both “time payments” (wait in line), or “money payments” (buy on eBay), the market clears more often and more efficiently than if only the “time payments” option was available.

Arbitrage does redistribute profits, however, and this is the oft-demonized aspect of it. The higher market clearing price brings in huge profits, which go to the intemediaries, the “arbitrageurs”, instead of the manufacturer. Ars Technica, a geek website, has an online forum for buying and selling goods. They explicitly ban “profiteering”, which is considered selling a publicly available good above fair retail price. Such bans do no good for the economy. They prevent willing parties (buyers and sellers exist on these forums) from engaging in a mutually advantageous exchange.

Economists everywhere are likely relieved, however, at the relative lack of badmouthing of arbitrage in the news. Often, the reselling of the systems is an addendum to the main news article: “Many of the purchasers are turning them around and selling on eBay for hundreds more, in hopes of making some money for their hours spent waiting at the store. So Bob, how’s the weather look this weekend?” I’ll take no coverage over bad coverage of a good economic mechanism any day of the week.

Despite the obvious profit opportunities of selling my system, however, I intend to keep it. I consider the fun that I’ll get from owning it more valuable than the money I’d get if I sold it. Sorry: you’ll have more posts about “Stupid Games I Bought”, and less posts about “Ways to Waste 500 Dollars in a Week”.