Every Xmas we witness the same ridiculous spectacle of the year's hottest gift selling out. This Xmas looks to be no different, with one (yes, hardly disinterested) Microsoft exec telling Techcrunch last week that anyone who was serious about having a Kinect in time for the holidays should have already picked one up by now. (Incidentally, if he really believes it his garage should be full of the things, ready to resell on eBay once the shortages kick in - odd that no-one thought to ask him whether this was the case.)
Five years ago my friend Tim Harford posed the question on Slate:
"Xbox 360s are the latest in a long line of Christmas products to suffer spectacular shortages. The shortage of supply isn't the puzzle; the low price is. Why doesn't Microsoft raise prices temporarily from the current floor of $300 for a basic console? Why doesn't the company auction them all on eBay, where consoles are currently reselling for $700 and up?"
He and his correspondents came up with a number of answers, with the favourite being Marginal Revolution's Alex Tabarrok who suggested that the issue was price elasticity - while a handful of Xboxes xold on eBay for $700 make Microsoft look silly for pricing them at $350 in the primary market, in fact most buyers are sufficiently price-sensitive that if Microsoft had raised the price to even $375 the Xbox, far from selling out, would have sat in the warehouses in its thousands.
It's a good answer. But to my mind this isn't - directly - about the suppliers. It's about the retailers.
Picture the scene. It's a cold and blustery late November evening, and Mum and Dad are talking to little Johnny about what he wants for Xmas this year. No surprises; like every boy his age, little Johnny wants a Kinect. Mum smiles indulgently. Dad (with just a whiff of the savanna in his nostrils and a happy vision of barging his hunter-gatherer competitors aside on Oxford Street) assures little Johny that he'll be able to get him a Kinect for Xmas.
And so a million families promise a million children that they will get the toy they want for Xmas. But if there's only half a million of the things on the shelves in the run-up to December 24th, each family then has two possible outcomes. One, Dad manages to score Johnny's Kinect. Rejoicing by all, Xmas is saved. Two, Dad doesn't score a Kinect. Solution? Dad buys Johnny something pretty damned expensive as a substitute, just for now, and picks up the promised Kinect in the new year when more supplies come in. Microsoft is happy - it's sold all the Kinects it expected to at minimal risk and marketing expense and without having to build a wasteful one-off factory to deal with the spike in Xmas demand. And the retailers are even happier, because rather than selling a bunch of people one expensive Xmas gift they've sold quite a lot of them two. (With the second in most cases being a big-ticket item selected almost at random in a Xmas eve panic - a golden opportunity to shift the toys they made a bad call on and no-one really wanted.)
The retailers clearly benefit most not from a rational market in which the most desirable Xmas toy is priced at the level where demand will meet supply. (In that scenario, half a million parents look at the price tag and tell little Johnny that they're sorry but they can't afford a Kinect this year.) The retailers benefit most when the hot Xmas toy is something in short supply, with just enough on the shelves that people think it plausible to promise there'll be one under the tree on the big day.
So why would Microsoft do it? Because the retailers will practically gurantee a sell-out, at their own marketing expense, of the hot Xmas toy - so long as it's priced below what the market will actually bear.
(Photo from Cha già José on Flickr)
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