Inflation Is Driving Secondhand Markets Out Of Control, Here’s Why | Economics Explained

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

Channel: Economics Explained

Views: 1,303,744

Keywords: rolex, rolex daytona, rolex Panda, rolex oyster, supply and demand, rolex price appreciation, rolex investment, secondary market inflation, us market inflation, used watch market, inflation, transient inflation, american inflation, inflation price index, price index, price inflation, introduction to inflation, macroeconomics, why prices are rising, economics, economics explained, inflation 2022, stock market crash, stock market analysis, inflation explained, second hand market

Id: mn6NwCvFIaA

Length: 15min 57sec (957 seconds)

Published: Wed Oct 13 2021