Thursday, November 24, 2005

Xbox-onomics

After explaining a few concepts to someone last night, I realized that the Xbox 360's debut is greatly illustrative of some introductory microeconomics. Some say that Microsoft purposely created a "shortage" (which in economics is more properly called a scarcity) to hype up demand. That could well be, but I'm going to examine what does not require speculation.

It all began with my explaining to someone why it's not worth my time to fix my own breakfast and lunches. I always buy them when I'm working. It would be cheaper monetarily to fix them myself and bring them to work, but that's not the full cost. Preparing them takes away from my already limited, hence very valuable time, and I happen to value certain amounts of money less than having more time. Therefore I am willing to trade several dollars for a meal not just because it is convenient sustenance, but so I can have more time to spend with friends, to blog, to sleep, etc.

I explained that convenience is why people pay much higher prices for small bottles of soda at checkout lines, instead of getting the larger bottles that are better values. And, I added, such a purchase is perfectly rational. It's not the most efficient transaction insofar as money, and perhaps for most people it's not even worth the convenience factor. Nonetheless, the buyers arrived at the decision using reasoned judgment, weighing the risks and gains; whether it took a second or a day, the decision is a rational one.

Then the other person sent me the link to this eBay sale, commenting, "Care to talk about economic rationality?" So someone was willing to pay $9100 on an Xbox 360 premium package, about 19 times what one of my friends paid for the same, which at first seems like a big waste of money. But when you examine the circumstances, this purchase turns out to be an exceptionally rational decision. It's less and less an impulsive buy because of the several steps required to register with eBay, place bids and contact the seller. Also, the buyer more likely evaluated the purchase carefully simply because the quantity of money is more significant than a 20-ounce soda for $1.

To buy his Xbox for a monetary cost of $479, one of my oldest friends camped out all night in freezing weather. On the other end of the consumer spectrum, the eBay auction winner clearly valued staying at home, where it's warm and familiar, where he can buy the product online and wait a few days to have it shipped, as worth more than $8621. Depending on how highly some people value time, convenience and comfort, they are willing to part with a greater amount of their wealth than a purchase's listed price.

Couldn't the buyer have spent less to hire someone in real life to camp a store for him? I imagine a lot of young men would have done it for $1000; perhaps $2000 to start, and a ready supply of labor would bid the price down. However, hiring someone still would have carried the risk of "disappointment" (being unable to buy the item at market price or even greater), because the person hired might go through the wait and be out of luck. So part of the $8621 premium was the buyer's desire for insurance that the sale would actually happen.

Couldn't the buyer have done better at other eBay auctions? Radical ignorance (pure "not knowing" and in fact not knowing you don't know) is highly improbable, since a typical person would realize there were other Xboxes being auctioned. Without scrutinizing the person's bid history, I'd guess he or she decided to stick with that single auction, for reasons ranging from preferring that seller (feedback ratings, conditions, etc.) to deciding that spending thousands of dollars more was worth more than the search costs of bidding in multiple auctions. The latter carries the risk of winning multiple auctions, which can give you negative feedback should you back out of any.

It's safe to conclude that a quite wealthy person bought that Xbox; a working class individual would not spend that kind of money. He's about 5'11, sandy hair and brown eyes, between 50 and 55, a slight case of carpal tunnel in the left wrist, a mild case of gout, and a family history of heart disease. The one conjecture I will offer is that it's a parent for his or her young son, and they didn't pre-order for one of two reasons: they didn't know (either of the new Xbox or that they would want it), or they waited for reviews before committing. Many Xbox 360 reviews like this one are extremely unfavorable, and for seemingly very good reasons, but it still hasn't deterred a lot of people from going half-nuts trying to get one.

Economics tells us that the eBay seller was serving a valuable purpose as middleman, bringing together the original seller and the ultimate buyer. Clearly someone was willing to pay $9100 for an Xbox, and even at that price he may not have found one without the eBay seller, so another part of that $8621 is a willingness to pay a finder's fee. I salute this example of arbitrage and don't consider the profit "excessive" in the least, since the deal was purely voluntary. If you think the eBay price (or the original retail) is outrageous, you are free not to buy an Xbox 360 and instead wait for the PS3. Your kid (or you) might be disappointed this Christmas, but weren't we all taught from a young age, "Life isn't fair, and you can't always have what you want"? Or in this case, have what you want at the price you want. I personally think it was for the best that my parents couldn't find any Transformers for me -- Christmas 1984, I think.

3 Comments:

Anonymous Rebellion Coffee Co. said...

Dear Perry,

Great rundown of the ebay Xbox phenom this past week.

Did you ever get the Transformers?

Anyways, if you celebrate, Happy Thanksgiving to you. Please keep up the good work for all friends of liberty.

Sincerely,

Rebellion Coffee

Thursday, November 24, 2005 4:20:00 AM  
Blogger Perry Eidelbus said...

Thank you, RC, and a Happy Thanksgiving to you too!

I never did have any Transformers when I was little. As an adult, I've made up for it. Starting a few years ago, I bought the DVD releases of the Transformers movie (which has a dated but still pretty rockin' soundtrack), season one of the TV shows, then the second half of season two. After I finish the latter (a few episodes to go), I'll pick up the first half of season two.

One of my favorite episodes is when the Aerialbots go back in time to old Cybertron, after one of them doubted that the Decepticons were really evil. Seeing what Megatron did to a young Optimus Prime showed them that sometimes evil is truly evil, not just relative.

Thursday, November 24, 2005 10:52:00 AM  
Anonymous Anonymous said...

Being the 'old friend', I have one other important part to add. I was with two friends and their wives, one of which stayed the whole night with us. Friends I don't get to see much of anymore and a long line waiting for something to be released is a recipe for good times.

My current review of the Xbox360 is that it was worth every penny. I have not had any problems with mine.

Thursday, December 01, 2005 8:32:00 AM  

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