What Can the Playstation 5 Teach Us About Economics?
On November 12, 2020 — in the midst of a pandemic that has locked many people in their homes, Sony launched their much-anticipated PS5. What can the launch of this gaming console teach us about economics? The ugly side of supply and demand.
Originally retailing at $399-$499 ($399 for the digital version; $499 for the disc version), the console sold out in minutes. Now, people who want their own PS5 will have to shell out upwards of $1,000 on the secondhand market, more than double the original price. What went wrong?
What happened here, what can we learn, and what can be done to avoid this in the future?
Quite simply, the law of supply and demand worked as expected, and it’s not always pretty when supply can’t meet demand.
Sony: Even if Sony was able to peek into a magic ball to find out the exact demand for the PS5, they can only manufacture so many consoles prior to the release date. In reality there is no magic ball, but they do have a team of forecasters and it’s very likely that they knew they would not be able to meet demand. So why couldn’t they just raise the price to lower demand?
- It looks bad on Sony: If people are already willing to buy Playstation 5s on the secondary market for $1,000 then Sony clearly can raise the retail price. However, this looks greedy — which in the long term will harm the brand’s reputation.
- It prices out customers: There are going to be a large number of consumers who are not willing to pay much more than $499 for a PS5, especially when competitors such as the Xbox series X are retailing at a similar price. It’s in Sony’s best interest to make sure that these consumers will still buy their consoles.
- Supply will eventually meet demand: Sony only had a few months to ramp production up for the November release. However production lines are still going strong, and over the next few months we should start to see restocks that don’t sell out in minutes. And in a year’s time, we’ll eventually have units sitting on the shelf at $399-$499.
- Hype: With demand far outstripping supply, there is an element of exclusivity that comes with owning a PS5 right now.
The resellers: Knowing that demand would certainly outstrip supply on release day, there are a group of people who will buy PS5s with the sole purpose of reselling them for a profit. Serious resellers typically have a better chance at obtaining consoles over regular consumers because they often use bots to speed through the checkout process.
Ethics aside, reselling makes perfect economic sense. Every PS5 that is resold is equivalent to $500 in profit. It’s also not a hard task — it might take an hour to buy the console online, list it on eBay, and a drive to the post office to sell it. This means that each console resold would be equivalent to making $500/hour. There aren’t many professions that pay even close to that rate. Scalpers are the true winners of the release.
The consumers: Those lucky enough to get a console at release should be elated —by paying retail prices, they were able to get a console for much less than countless others are willing to pay. For those who were not quick enough and bought a console on the secondhand market— they are still seeing economic benefit. While it may feel bad when buying from a reseller at 2x the price, they should still be benefitting otherwise they would wait for the price to drop.
What can we learn?
As a consumer: If you want something, try your best to optimize your chances for buying the item for retail. Find out when the item will release, and do your research on the best way to get the item. For the PS5, this can mean recruiting friends to help you, having many tabs open on Chrome, and refreshing constantly near the release time. This advice would also apply for those wanting to go to Burning Man, Hamilton, or Coachella — tickets will release a few months before the event, so try to find a presale code and make sure you’re on Ticketmaster at 10AM when the tickets release.
As a reseller (playing devil’s advocate here): Focus on finding opportunities where demand is likely to outstrip supply. If inclined, find out how to speed up your purchase as well (autofill, bots, etc.). Maybe you resold just one PS5 this time around for $500 in profit and are looking for that rush again. Sure there will be PS5 restocks, but eventually the supply of PS5’s will meet demand and there will be no more money to be made reselling PS5’s, especially when you account for the cost of selling on eBay (10%). To get started, concerts or festivals are good candidates where demand > supply— Coachella Weekend 1, hot Broadway shows such as Hamilton, and Burning Man are three safe bets. Limited sneaker releases also fall in this bucket.
What can be done to avoid this in the future?
A lot of the solutions will fall on the producer. They can do several things to avoid strong reselling markets, whether it be a physical item or tickets to an event:
- Raise prices: Simple, but as discussed above — may not be the right decision long term.
- Produce more: Sometimes this is not possible — manufacturing physical units such as game consoles have complicated supply chains, so you can only make so many in a short amount of time. For concerts, artists can try to book bigger venues or add extra nights in a city to increase supply.
- Preventative measures against resellers: Invest in better tech to prevent mass purchases. IP addresses, device IDs, adresses, payment methods, bot detection, etc. can all be used.
- Make it easier for loyal consumers to purchase: If Sony was were able to track hours played on the PS4, give a presale code to the people who have the top 5% time played on the PS4 as they are very likely to be the types of people who will buy and use the PS5. Some artists already do this — if you’re a top 1% listener to an artist on Spotify, you might get an exclusive presale code for an upcoming concert.