Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Wednesday, August 17, 2005

Scalping Computers: What Happens When the Price Is Set Less Than the Market-Clearing Price

When the price mechanism is not used to ration scarce goods, other rationing devices must be used. Some of the criteria include:

  • Strength. Stronger people or countries muscle out the weaker ones.
  • Queuing. First-come, first-served -- but it requires some enforcement.
  • Privilege. Those who know the right person or live in the right place benefit.

All three criteria were used when Henrico County, VA, decided to sell off a thousand 4-year-old iBooks for $50 each. [registration required]

Four years ago, Henrico County purchased 18,000 of the computers for about $1,100 each for its public school students and teachers. The county decided to sponsor yesterday's event to sell 1,000 surplus iBooks to residents.

The county posted the event on its Web site, local newspapers ran stories on the sale and news otherwise spread on blogs and by word of mouth. But no one expected such a crowd, Stanley said.

... the county initially was going to open the sale to the general public. When Henrico began receiving inquiries as far away as California and Germany, however, it decided to restrict the sale to county residents...

"I just think the whole system was overwhelmed with the number of people that showed up," he said.

People began lining up as early as 1:30 a.m., and the traffic to the sale caused a five-mile backup on streets leading to the raceway. Some people parked a mile away and walked to the gates for the chance to purchase one computer each.

When the gates opened, Stanley said, one "aggressive group of individuals" rushed through.

And, of course, when the nominal price is set below the market-clearing price, people have an incentive to resell the product at a higher price (I've heard of scalping sporting event tickets, but scalping computers? It's just another form of arbitrage.):
The sale ended by 1 p.m., and many people left empty-handed. Some who bought laptops sold them to others for more than $50...
A terrific example of supply, demand, and market-clearing prices.

Update: Phil Miller suggests they should have checked out e-Bay to get an idea about the market clearing prices.
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