What happened to the law of supply and demand?

Question

It seems common these days that manufacturers have very limited supply, yet are pricing products as if there was no supply issue. Some examples:o Xbox Series X and PS5 consoles are have very limited availability from retailers at their MSRP of $500, and are instead being scalped on eBay for upwards of $850 to $1300.o Thinkpad AMD Ryzen 4xxx T series laptops have ship dates of more than 5 weeks, yet have massive black friday discounts.o Apple M1 laptops with 16GB of RAM have ship dates a month out, and are not being sold at a substantial premium.Why are manufacturers not taking profits when demand is so clearly outstripping supply? In the Xbox/PS5 case, its clear that scalpers are taking profits. If the natural price of a PS5 is $800, isn't it better to just let me pay that via normal retail channels, and not have to deal with a potential scammer on Ebay?

ksec · Accepted Answer

>What happened to the law of Supply and Demand?
Working in absolute perfection.
The question here really isn't about Supply and Demand, but product pricing, sales and marketing strategy. Where each on itself is a complete topic of its own.
What you are suggesting here, is that for example, Sony announced their First Batch of PS5 will go for retail price of $800, and two months later it will be back to normal $500.
Problem 1. There will still be scalpers, the market for first to own PS5 is a lot higher than $800. I could resell a PS5 right now for $1000 USD with queue in my front door.
Problem 2. Getting a $800 RSP may create lots of bad press and un-intended consequence for marketing.
Problem 3, Generally speaking having constantly sold out PS5 is a good marketing problem to have. Lots of opportunities to talk about the product. Hunger marketing is real.
Problem 4, An RSP of $800 or higher RSP will create opportunities for your competitor.
Apple has been getting very good at handling these sort of thing and the only way to stamp out most of the scalpers ( most, not all ) is to absolutely flood the market at first launch. Of course that partly only works because they are Apple, the best supply chain and logistic company in the world.

danbolt · Answer

I can't comment on Apple laptops or AMD processors, but game consoles usually try to operate with a Razor and Blades model[1]. A manufacturer such as Sony likely wants to get the install base of a PlayStation to be as big as possible and as quickly as possible. This results in a steady stream of royalties as new games release and there's a larger market for them. The consoles more or less create demand for games.
The PlayStation 4 is a decent example as it sold quite well when it launched, and that enabled Sony to earn revenues on popular games such as Final Fantasy VII Remake or Ghosts of Tsushima late into its life.
[1] https://en.wikipedia.org/wiki/Razor_and_blades_model

codezero · Answer

All these examples strike me as long term purchases - and the immediate high price/scalping/availability is just because some people want them _now_ but most of the market doesn't care to have them next week, and can wait a month, as they typically replace an already working device.

fred_is_fred · Answer

Most of the money Sony/Microsoft will eventually make on the platform comes from subscriptions, game sales, and other add-ons - its in their best interest to get to as many people as quickly as possible. The "subscription" model of selling hardware is what broke it for that example.

ksherlock · Answer

Econ 101 supply-demand models have some assumptions (like a competitive marketplace) that don't really apply in your examples. It works great for fungible product like toilet paper, not so great when there's only one provider of an item.

beardedetim · Answer

I think the difference here is the inability for the Manufacture to change their pricing _in real time_ like eBay and other resellers can.
Acme Co has to set up legal frameworks and expectations from its merchants. That gets decided probably long before shipping. Those things are set in stone before the market tells us what they will pay.
From my econ days, the word `inelastic` keeps coming to mind but it's been so long I might be misapplying that word here.

galaxyLogic · Answer

Well yes but it would be bad publicity for the manufacturer. They would be perceived as the scalper then. Whereas it's good publicity for them that the second-hand market is pricing their products over the retail. People want them so much.Also the way products are compared in the press say AMD vs. NVidia is equally priced items are compared to each other, and you want to win such comparisons.

Rastonbury · Answer

Products prices are sticky and cannot be easily price discriminated, demand from those that want to be first to own something is very price inelastic. Shortages are also good publicity.For ryzen, the price is possibly a driver for the demand, if they jacked up the price above a substitute, its likely all their orders would disappear and go to competitor.

al_chemist · Answer

Stability of price is good for company, because:
a) middle managers can just do (price x amount of sold items)
b) if price goes down in time then some customers will wait indefinitely for better price
c) good publicity if your item is sold cheaper than competition
d) changing price can be seen as "our product is worth less than we expected"