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Inflation Is Driving Secondhand Markets Out Of Control, Here鈥檚 Why | Economics Explained - YouTube
Channel: Economics Explained
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let's give all of you watching some
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homework this is a rolex daytona or more
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specifically a rolex daytona
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116500 lunette noir which i do realize
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saying out loud makes it sound like a
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piece of french agricultural equipment
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so most people just call it the panda
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pretty cute right anyway the homework i
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want to play a little game i want you to
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go out to an authorised rolex dealer in
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your respective city and buy this watch
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you don't even need to haggle on price
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just try and buy it it should be worth
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the equivalent of thirteen thousand to
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fifteen thousand us dollars depending on
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your local exchange rate and sales taxes
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pretty steep but for dropping small car
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money on a shiny piece of metal that
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tells time worse than your iphone you'd
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at least expect them to roll out the
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welcome wagon at the shop right well
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chances are they probably won't now if
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you're thinking what gives mr economics
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man you want me to drop a quarter of the
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average american's income on a watch
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from a store where they're just gonna
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snub me this sounds like the worst piece
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of homework ever but here's the kicker
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if you do buy one of these particular
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watches from an authorised dealer you've
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just made yourself an easy fifteen to
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twenty thousand dollars in a few hours
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not bad right now if you're thinking
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this all sounds too good to be true let
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me give away the secret it's almost
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impossible to buy one of these things
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trust me i actually wanted to get one to
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celebrate the channel getting over 1
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million subscribers and i have basically
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got laughed out of the shop so if by
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some miracle you do manage to buy one at
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retail price there will be a line of
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people willing to buy it back off you
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for a 100 markup or more
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so what is going on here this particular
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watch is just one example of a new
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phenomenon of consumer goods that are
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theoretically for sale but you can
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almost never buy now you might say well
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that sounds like everything right now
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from playstations to toilet paper sure
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there are some similarities here but
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this particular class of goods is a
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little bit different for starters this
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isn't a temporary supply chain issue
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caused by an unforeseen global pandemic
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this has been going on for years and
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years what's more is that these items
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don't have to adhere to price controls
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in the same way that regular consumer
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goods do so there is nothing stopping
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these companies from charging the
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demanded market price for these products
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and pocketing an extra twenty thousand
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dollars per watch or ten thousand
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dollars per handbag or million dollars
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per car as pure profit but they're not
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and there is a very good reason why
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so
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what are these items that can so easily
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break market expectations of supply and
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demand why don't these companies just
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charge more for these items and make
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themselves more money and finally how is
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this whole practice actually entirely
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logical within our traditional
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understanding of economics
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so we have already seen one example of
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these products but there is actually a
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pretty diverse range of them it's
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everything from certain luxury
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wristwatches to designer handbags
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invite-only sports cars and even things
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like sneakers these products all have a
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few distinct things in common for
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starters they are obviously all luxury
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goods but just being a luxury good
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itself is not enough to be classed as
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one of these market-breaking goods i
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could walk into a gucci store tomorrow
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and buy this hideous sweater it doesn't
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mean that i can then turn around and
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sell it on ebay for double the price if
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anything i'd be lucky to sell it at all
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the next thing that they have in common
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is that they are limited in supply in
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some way some companies do this directly
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like automakers who might only make a
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set number of a certain car and other
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companies do this indirectly like a
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fashion brand refusing to produce their
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bags outside of a small studio in france
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to maintain quality the third ingredient
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is obviously strong demand that should
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go without saying but there is a little
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bit more going on here than you might
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expect so remember this for later
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because it is really important finally
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there is an unwillingness to move on
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price typical market expectations go
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something like this if demand exceeds
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supply then prices rise to such a point
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where demand and supply are equal and
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everybody that is willing and able to
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purchase an item at the new higher price
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has done so now this is especially true
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for these types of totally unnecessary
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items because they are what is known as
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veblen goods or goods that actually
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attract more demand as prices increase
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we have looked at veblen goods in detail
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in our video on the luxury goods market
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so i don't want to repeat too much here
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but basically if you are buying
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something to let's be honest show off
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its usefulness is directly proportional
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to how expensive it is a 500 coach bag
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and that's cool but a 20 000 hermes
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birkin oh damn that person's got the
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cashola a 1 000 lon jeans might look
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identical to this 150 000 patek philippe
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but the people that know know that one
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of these is a great watch and the other
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identifies you as the most important
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person in the room so why then are these
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companies not just playing into this and
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jacking up their prices to such a point
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where they can get the most possible
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money out of the most possible people
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well the official answer that they will
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give is that they are all about the
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artistry and they want to make sure that
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anybody that is truly passionate about
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the brand can afford one of their
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watches or bags or whatever
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so generous of them to be so concerned
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about the affordability of their
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five-figure fashion accessories but
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anyway this might almost start to make
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sense when you consider companies like
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rolex are actually owned by charitable
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foundations in their case the hans
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wildhoff foundation but most aren't most
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are owned by giant multinational
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corporations with shareholders who want
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to see a return on their investment
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artisanship be damned even beyond that
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sure rolex is technically owned by a
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charity but that charity would be able
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to do more work if it had more money so
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the reason these companies give for not
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charging more money for their products
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doesn't really hold up to too much
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scrutiny
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so the real reason they do it is twofold
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you might have noticed one last
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similarity between these products and
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that is that they are all sold by
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authorized dealers not the company
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themselves you're probably most familiar
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with this in the context of a car if you
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want to buy a new pickup you don't go to
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a ford website or into a ford store you
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go to an authorised ford dealership
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which is technically a middleman between
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the manufacturer and the consumer why
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that is is a whole separate story but
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for now just remember that for better or
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worse these dealers handle the retail
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sales of the manufactured products now
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this relationship works well in a few
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ways it means that manufacturers
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especially boutique luxury manufacturers
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can focus on what they do well it also
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means that they don't need to handle
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operations in dozens of different
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countries but of course with that ease
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of operation comes a few points of
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tension some dealers might want to
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charge more or less for a given product
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while others might aggressively compete
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with other dealers that just so happen
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to be selling the same brand dealers may
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also want to go about selling their
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products in a certain way that might
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land them a commission in the short term
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but damage the brand in the long term
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just imagine if you had a terrible
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experience at a car dealership you
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wouldn't think oh bob's chevy and
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pontiac automotive group are terrible
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you would think that chevy and pontiac
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are terrible of course manufacturers can
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always sever relationships with dealers
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that sell their products but that's a
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bit drastic what works better is saying
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hey if you sell a lot of our cars or
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watches or whatever we will send you
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some stock of these ultra limited and
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highly in-demand models a ferrari
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dealership that keeps ferrari happy will
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get an allocation of sf90s a rolex
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boutique that sells lots of models that
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are less in demand while maintaining the
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product image of rolex will be given
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submariners and gmts and daytonas that
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will sell instantly now this is really
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important for these dealerships because
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even though they will still not be
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allowed to sell these rare items for any
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sort of markup they can use them for
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something much more important building
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relationships with crazy rich people
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with more money than common sense if a
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car dealership says to a regular client
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of theirs hey buy 10 of these regular
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ferraris and when we get an allocation
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of a really rare model we will make sure
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you're first on the list then they have
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a pretty good shot at selling some very
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expensive automobiles they might never
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say it in as many words there is
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normally a lot more wink-wink
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nudge-nudge but that's basically what it
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boils down to
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so now that we understand all of the
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players in this market we can see that
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it's all pretty logical the manufacturer
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makes a whole bunch of items including
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some very special items in very limited
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supply they can be sure that the dealers
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that work for them will be more than
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willing to buy up all of their regular
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stock in the hope that they get a nice
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healthy allocation of this special
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in-demand stock these dealers can then
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leverage access to these rare items by
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encouraging their customers to buy up
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more and more of the regular stock in
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exchange for their name been bumped up
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the waitlist a bit this means more sales
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for them and more commission than they
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would have otherwise got by just selling
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that rare item at the fair market value
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and don't think that this little dance
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screws over the end customer either so
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long as they actually do get to buy the
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rare product that they were informally
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promised they would be in a pretty good
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spot if they actually want to keep the
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product great they get the ultimate
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status symbol something that is
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obviously very expensive but also so
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exclusive that their rich golfing
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buddies won't even have the privilege of
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being invited to buy it if they wanted
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to sell it well that's where things get
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interesting
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we have already seen that the difference
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between the retail price and the fair
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market price of these items can be huge
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some extreme examples like a patek
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philippe nautilus can sell for as much
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as five times what they are worth retail
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so if anything the client is probably
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the biggest winner in this deal right
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well not necessarily because simply
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looking at this transaction in isolation
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ignores all of the other goods that they
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would have had to purchase to be granted
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the privilege of buying these exclusive
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items if you needed to buy 10 ferraris
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in order to be invited to buy one
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limited edition car you have probably
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dropped at least two or three million
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dollars in the process suddenly the 1
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million dollars you might make by
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flipping this exclusive car doesn't
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sound so amazing and you might say yeah
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well if they really wanted to they could
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sell the other 10 cars too right and
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yeah they could but there are actually
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two major problems with that for
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starters this is where we actually get
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to find our market equilibrium if for
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example you wanted to turn a profit by
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buying a fancy watch at retail and then
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reselling it to the secondary market
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you're going to need to buy up a whole
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bunch of unpopular watches first each
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one of these purchases is going to lose
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money even though they might be luxury
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goods they aren't that hard to find so
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they don't demand the secondary market
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premium let's say you need to buy 10
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watches to be offered one special watch
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and each one of these watches loses you
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2 000 on average and the difference
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between the retail price and the
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secondary market price well that means
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that when you do turn around and sell
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all of these you have at best broken
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even not great when you consider the
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time and effort that went into this
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process not to mention the fact that you
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might not get offered one of these
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watches to purchase you would be tying
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up hundreds of thousands of dollars in
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capital locking in a significant loss
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all in the hope that maybe you would be
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offered a watch in which case you would
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make a tiny profit if you're lucky not a
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great deal the particularly astute
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amongst you might see what has happened
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here though this is market equilibrium
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don't think of rolex or omaze or ferrari
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as selling individual watches handbags
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or sports cars think of them as selling
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a collections they have priced their
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collections perfectly
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sure they could sell these special goods
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for more but then people wouldn't be
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willing to buy up all of these
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qualifying pieces what they have
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effectively created is an auction house
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in disguise people don't bid directly
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with cash they bid with how many regular
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luxury items with insane markups that
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they are willing to purchase
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what this means is that if someone
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really does just genuinely want a nice
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watch they are often better off just
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buying it at resale price because they
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would end up blowing just as much doing
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it the other way these items don't break
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market expectations they just shift them
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around a bit now the other reason that
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you might find it hard to create a
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profitable little side hustle by
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flipping luxury goods is because the
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manufacturers are surprisingly tough on
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this practice
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ford may not be the first company you
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think of when it comes to high luxury
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but they have recently released one of
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these ultra limited run products with
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the ford gt they invited 400 people to
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purchase these cars and almost everybody
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did because you'd be kind of silly not
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to right even if you didn't like the car
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you could flip it for a healthy profit
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well ford knew this so they put a
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stipulation in the contract of sale that
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the car could not be resold for the
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first 24 months of ownership sounds
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pretty weird being told what to do with
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your own property right well john cena
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of all people thought so too as he was
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one of the lucky 400 invited to buy the
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500 000 car and then he almost
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immediately resold it for 1.54 million
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dollars not a bad little deal but
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needless to say ford was not super happy
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about this and actually took him to
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court before forcing him to settle the
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case for an undisclosed amount there are
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numerous other cases just like this
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where the brands will try very hard to
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stop people from openly scalping their
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ultra-exclusive goods because it kind of
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makes them look bad and attracts from
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the whole brand appeal that made this
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insane process possible in the first
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place now there is one last group at
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play here the actual end users
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remember when i said demand for these
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products was something to keep in mind
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throughout this whole video well i hope
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you have been because this all
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ultimately still relies on people that
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are willing to put a 30 000 watch on
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their wrist market demand relies on a
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variety of factors but one of the
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biggest ones is the expectation of
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future price growth we have explored
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this in a few videos as well as our
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video last week on china's insane real
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estate market the reason it's important
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here is that throughout this process
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certain luxury goods have managed to
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disguise themselves as investments with
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a healthy expectation of future price
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growth you might hear people talking
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about how it's actually cheaper to own a
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rolex than it is to buy a seiko because
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after you get bored of your rolex you
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can sell it for the same price if not
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more than you purchased it for now there
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are a few problems with this i mean for
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starters that money could have been
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invested and been making more money but
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ultimately they're not entirely wrong
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until they are this whole process is
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reliant on end users demanding
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ridiculously expensive luxury items the
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demand for these end users is going to
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be a lot higher if they can convince
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their husbands wives accountants and
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even themselves that this isn't a
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terrible investment hiding the fact that
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these really are just normal products
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that respond normally to the forces of
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supply and demand maintains the illusion
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that these items are something so
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special that they deem themselves worthy
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of being classed as investments
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so why is this important silly rich
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people doing silly rich people things
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with other silly rich people interesting
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maybe but far from consequential right
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well maybe not as the pandemic has
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shocked supply chains a lot of regular
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companies are starting to see the power
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of these semi-attainable halo products
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luxury goods are the logical place to
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start this scheme thanks in equal parts
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due to their distribution network their
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insane margins and let's be honest their
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loose relationship between price and
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utility value but there is no reason
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that this marketing tactic couldn't
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slowly move down market playstation 5's
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only been made available to gamers with
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the largest sony exclusive content
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libraries don't tell me it sounds
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totally unreasonable but for now anyway
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i'm just gonna need to sit here and hope
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that one day i'll be given the chance
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nay the honor of being able to drop a
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dumb amount of money on a shiny wrist
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trinket that commemorates passing a
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million subscribers on youtube
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