Inert Detritus The Internet's dust bunnies

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”.