What to do about scalpers and price gougers

As I brought up in A Tale of Two Price Points, a few days ago, it’s become a common practice for scalpers to buy up all available inventory at retail in order to price gouge real customers.

I’ve been thinking about this from a variety of angles.

“Scalping” is a predatory practice whereby an intermediary intercepts inventory, preventing an interested buyer from making a purchase at the normal price. Scalping is parasitic on the industry it preys on. Scalpers add no value to the transaction, only extract. They are able to do so when the buyer is desperate and has the available money to cover the increased cost incurred by the practice.

Scalping introduces numerous inefficiencies into the market. Their purchase is taxed for sales tax, and when they re-sell the game, this sale is also taxed, resulting in a double tax on the purchase. As well, the product ends up being shipped twice, once to the scalper, and then a second time to the eventual buyer. This wastes packing materials and fuel and time, all of which have value and add impact to the environmental footprint of the product. Finally, scalpers typically sell through online marketplaces such as ebay or mercari, that charge a fee, so this fee is also detracted from the markup, there’s additional transaction fees oftentimes, as well. All of which adds up, and whittles away at the actual profit realized by scalping.

We can take sales data from ebay closed listings and get an idea of what scalpers are getting for the game. In the first few days after Metroid Prime Remastered became available for purchase, it sold on eBay for an average of $69. This average has fallen off since then to $62. Scalping is a strike-while-the-iron-is-hot scheme, so it makes sense that the price has already started to come down — the most fanatical customers have gotten their copies ordered by now, the opportunity to be the first kid on your block to have a copy has now passed, and retailers are starting to replenish their depleted stocks. But for those first few days, the scalpers were able to take a lot of profit.

Let’s look at what happens when you buy a game for $39.99 retail, and then scalp it for $70:

The scalper pays $39.99 + tax + shipping. (Maybe they avoid shipping cost by buying from a retailer that does free shipping, or picking up in store.) Sales tax varies depending on locality, but we can pick a reasonable average value, let’s say 8%. Let’s say the end price is $39.99 + $0 for shipping because we pick up at the store + 8% tax, that’s $49.6584, which we can round up to $49.66. But our time and gas to pick up the game is worth something, so let’s factor some cost for this, say $10 for the entire order. We’re buying as many copies of the game as we can, because we want to maximize our profit from this, and to do that we need to ensure that the game is sold out. So ideally, we’re going to buy every copy in stock. Say the store has 20 copies, and we buy all 20. That $10 cost to pick up the order at the store can be divided by the 20 copies, so just $0.50 per copy is our cost.

So you sell the game on ebay for $70. Ebay charges 13.25% + $0.30 as a final value fee. But the final value fee is inclusive of all the buyer’s costs, including tax and shipping.

Say you sell the game for $70, plus $5.99 shipping. That 75.99 is assessed for sales tax by ebay, which again varies, but to keep everything even let’s assume the tax rate is again 8%. So the buyer pays $82.0692, rounded to $82.07. Now ebay comes in with their final value fee of 13.25% of that + 0.30. The final value fee of $11.17, which is deducted from your revenue, leaving you with $70.90. We deduct the $0.50 cost for our pickup expenses from that, so $70.40. Now you have to ship the game to your buyer, so you pay the $5.99 shipping out of that, you have $65.40, leaving you up +$22.21 for each copy that you sell. But if you have to spend money on shipping supplies as well, that eats into the cost, maybe another $1 or so for a padded envelope, now you’re down to $21.21.

And if you factor the time you took to do all of this: buy it, list it, pack it, ship it, what’s your time worth? Say that all told takes you an hour. So per copy you sell, you’re making $21.21 times 20 copies = $424.20 for an hour’s work.

And that’s why scalpers exist.

So, we need to figure out how to make it not worthwhile for them.

Should vendors care?

At first glance, it seems like the retailer shouldn’t care, a sale is a sale, and when they sell out their inventory, they get their money, so they should be happy. So too with the manufacturer. But Nintendo and retailers both should consider that scalping is hurting their real customers, as well as hurting their own business, and take action.

If the game will sell at above retail prices, then the retailer is losing the opportunity to make the money by selling the game at the price the scalper is getting. The retailer isn’t being hurt, exactly, but should see clearly that they have missed an opportunity to make even more money with a hot property. So the retailer should raise prices.

Retailers should also consider limiting quantities, a particularly during the initial week or month of release, in order to prevent scalpers from taking advantage. Quite likely this would solve the scalping problem by itself. A “1 per customer” rule would stop scalpers from being able to efficiently acquire enough stock to create the shortage, and would not get as many copies to sell, limiting how much they can profit from their scalping opportunity.

There are ways to circumvent rationing — multiple customer accounts, buying from multiple stores, etc. But the more inconvenient it is for scalpers to buy quantities of the game, the harder it will be for them to cause the game to sell out, and the less they will be able to profit from what copies they do manage to obtain.

When it comes to setting prices, the retailer’s hands may be tied by agreements with Nintendo to sell at Nintendo’s recommended price. But this same logic applies to Nintendo as well.

Nintendo has also seen it demonstrated that the market is willing to bear a higher price; by not charging that price, Nintendo is also leaving money on the table. The proceeds scalpers are taking from the resale of these new unopened copies of the game is money that could have went to Nintendo. Nintendo earned that money by developing the game. A scalper does nothing but inconvenience everyone.

It seems plain, then, that if the money is there to be made, Nintendo ought to be the one making it, and so should increase prices and take the additional profit for themselves.

Had Nintendo done so, they could have more than doubled their profits by charging the same price that the scalpers were getting for Metroid Prime Remastered. That money could have enabled Nintendo to pour more money into R&D and create even more games, which benefits the gamers who buy those games. By paying the scalpers this price instead, gamers will not get to see that benefit, because scalpers aren’t going to put any additional money into R&D for the next Nintendo hit.

Raising prices would not be a popular move with Nintendo’s customers, of course, but it’s Nintendo’s own customers who have demonstrated their willingness to pay this price. Nintendo could charge a premium for the game during release week, and then lower the price over time. Likely, knowing that the game will be considerably cheaper a short time after launch date, buyers will opt to patiently wait a week or two, and then buy.

And that might not be the best outcome for Nintendo. Typically, the sales curve for a game peaks on release day, and tails off gradually over time. By charging an early bird premium in the first week, sales would be lower, and after the price goes down, might not pick up as much. So pricing the game this way could introduce risk, and not be in Nintendo’s best interests after all.

So who can stop scalpers?

Vigilantism against scalpers

Gamers should boycott scalpers. The problem is that many gamers do not participate in such boycotts, and are willing to pay the higher price, and thus provide the incentive to the scalpers to do what they do.

Given that gamers have shown themselves to be unable to organize themselves to effectively boycott, what else might we do?

Activist gamers who want to combat scalpers can do a few things. First, you could buy the game from the scalper, then return it. This ties up the seller’s resources. The best way to do a buy-and-return is to use up all the time that you can, so that the game gets returned to the seller after the longest allowed delay. This way, when the seller does get the game back, the period of high demand will have abated, and the game will no longer command the inflated price the scalpers could demand on launch day. The scalper will then be stuck with a copy of the game that they most can only sell at a loss, and when this happens to them regularly, they will realize that it is no longer viable for them to continue scalping products, and stop doing it.

Probably, though, most sellers will not allow returns, and so in that case the buyer will need to do something more than that. Ebay and PayPal both have Buyer Protection policies which can be used to make a scalper’s life very difficult. Even if there is no return policy, a Buyer Protection claim can still be filed, creating problems for the seller.

I don’t think that Buyer Protection currently protects against price gouging, but we can suggest to Ebay and PayPal that they update their policies to include gouging and scalping. This would also kill the practice of scalping very reliably.

But even if it is not official policy to protect the Buyer against price gouging and scalping, the Buyer Protection policy may still be invoked for other reasons. Items not received, items that were damaged, items that were not as described. The buyer may invoke one of these reasons and create a claim that may force the seller to take a return, or take a loss. Again, if this happens frequently enough to the seller, the seller will realize that they cannot profit from scalping any more, and will cease the practice.

Even if a buyer may not always prevail in a Buyer Protection, the nuisance of it will cause problems for the seller that will dissuade them from continuing to sell if they receive enough of them.

Gamers who are upset with the practice should organize and act, because it will only work if it happens in large enough numbers to make the little bit of profit that scalpers are realizing no longer worth their trouble.

Updated: 2023-Mar-02 — 11:36 am

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