Silicon Iceman

In Defense of Scalpers

I realize this post isn't going to win me any new friends, but a conversation with my sister had me thinking about this topic a lot lately.

My sister was asking me (the video game nerd of the family) where she could get an Xbox Series X for her son's birthday. My knee-jerk response was "eBay." She looked at me with a combination of disgust and bewilderment. "Seriously," I told her, "that's the only place you're going to find one."

I then proceed to explain to her that it will likely be months before we start seeing store shelves regularly stocked with them. I continued by telling her that trying to get one at an online retailer like Best Buy or Amazon wouldn't do her any good because there are scalpers out there who have automated scripts that keep refreshing the page every second and if inventory becomes available, it'll automatically be added to their cart for purchase. There's just no way to beat a robot looking on multiple websites for the same item you are.

Then, she asked the all-encompassing question: "Why?" So, as I'm mentally connecting the dots in my head, I came to the realization that Microsoft priced the new Xbox console too low for the initial amount of units they produced. In other words, if Microsoft produced one million consoles, but five million people wanted it, then the price of the console has to be very high.

That led into a discussion about MSRP. For those of you who don't know, "MSRP" is business-speak for "Manufacture's Suggested Retail Price." This ancient relic of past retail has stubbornly made it's way to the digital age, where it is not needed. Because everything is digital now, manufactures can easily embrace the surge pricing model that allows the retail price of any good or service fluctuate with demand. Uber, for example, has successfully used this model to balance out the amount of drivers on the road versus the need for rides in any given area. The higher the demand for the rides, the more the drivers get paid. This, naturally, will attract more drivers to that area. Everything happens in real time.

Similarly, Microsoft should also have surge pricing where if they can only make 5 million consoles in the fourth quarter, but the demand is for 20 million consoles, obviously, they need to raise the price of the console to somewhere around $900 per console during that first run. As they keep producing units and demand at the higher price points gets satisfied, then the price of the console will slowly start to drop until it hits a natural market saturation point and levels off. That "leveling off" of where demand is pretty much satisfied based on the number of consoles produced, will lead to the most stable price point. Of course, we won't know what that price point should be unless we have the data across time from consumers.

Because it doesn't happen this way, scalpers and eBay are simply functioning as the "messengers" of the market demand. As long as there are people that are willing to pay $800 for a game console, there will exist someone else who will bring that console to that person willing to pay. Or as I like to put it, "If you want to get rid of all scalpers tomorrow, Microsoft needs to raise the price of the Xbox Series X to $850." Then, as the demand at that price point goes down, they'll lower the price of the console accordingly.

So next time people are talking ill of scalpers, remember, don't kill the messengers.