This week, outlets across the spectrum of establishment media were outraged at so-called ‘grinch bots.’ These are automated programs that make bulk purchases online so that scalpers can resell the items at higher prices. This has caused the prices of some toys to increase several-fold. For instance, a Barbie Hello Dreamhouse retails for $299.99, but on eBay, one reseller is asking for more than $4,600. This phenomenon has caught the attention of Sen. Chuck Schumer (D-NY), who said, “Grinch bots cannot be allowed to steal Christmas, or dollars, from the wallets of New Yorkers. …Parents have a real dilemma: either they can’t get the toy because the bots have scooped them up, or they have to pay an enormous price.” In a letter to the National Retail Federation and the Retail Industry Leaders Association, he wrote, “I am calling on your associations to immediately investigate how these dishonest software programs are being used on your members’ sites and take all available steps to thwart computer systems from cheating America’s consumers.”
Schumer’s comments illustrate an economic illiteracy that is all too common among politicians and pundits. Contrary to popular belief, scalpers perform an important function in an economy. In this case, they also provide other benefits that extend beyond economics and into culture. Let us examine these phenomena in order to see why grinch bots are good.
The Economic Role of Scalpers
When a manufacturer produces an item for sale, it is impossible to calculate the market clearing price in advance. The market clearing price is exactly what it appears to be: the maximum price at which the producer can sell all of the produced items. Any price above this level will result in unsold product, while any price below this level will invite people to buy up the items and resell them, also known as scalping. Whereas overproduction is the worst inefficiency in manufacturing, a producer would prefer to err on the low side of the market clearing price. This naturally produces excess demand, which in turn leads to higher prices. Part of this effect occurs naturally in retail businesses, but scalpers act as an additional market force to accelerate the price correction up to its proper level.
Scalpers also function as risk mitigators. If a scalper buys products and fails to resell them, then the scalper loses the entire cost of the item while the manufacturer, retailer, and everyone in between are reimbursed for their expenses. If the scalper does make sales, then he makes a profit and people find the products they want. The scalper is thus strongly incentivized to connect manufacturers and distributors with customers who want their goods. Note that the scalper is behaving like a retailer, in that he buys large amounts of finite, potentially scarce products and sells them for a profit to people who want them. Yet hatred of scalpers is common, while hatred of retailers is rare.
Some people will argue that scalpers are responsible for higher prices and lower availability, but this is merely a result of arithmetic, and would happen with or without dedicated scalpers speculating on Christmas toys. Suppose, for an example similar to the case at hand, that doll houses are selling for an average of about $300, there are 10,000 doll houses for sale every day, and 15,000 people want a doll house. To avoid distributing reservations without price rationing, which would result in reservations being made available in an arbitrary and discriminatory manner, prices must rise to a level where only 10,000 people still want them. This level may be around $450 in this case. How this $150 per doll house increase is distributed is what will vary, depending on how much scalping versus internal revaluation in retail stores is occurring.
Schumer makes two more especially ignorant claims which are worthy only of a cursory rebuttal. First, he contends that scalping harms the poor. This ignores the fact that scalping is an excellent economic opportunity for the poor, as they can make large returns by engaging in scalping. Second, he says that grinch bots are engaging in acts of theft and cheating. The idea that voluntarily purchasing a product at the offered price could constitute theft and cheating is simply bizarre.
When scalpers buy up Christmas toys and fail to resell them, there are additional benefits which extend beyond economics and into culture. There is an enormous opportunity cost involved with the holiday shopping season, as people spend money they do not have on items they do not need, then spend even more money on getting out of debt. One way of preventing this is for attempted scalpers to raise prices and thus reduce demand. This will cause people who are on the margin of shopping versus not shopping to reconsider in favor of the latter. Those who make one reconsideration are more likely to make other, related reconsiderations, so people who cease engaging in holiday consumerism may come to some deeper personal or spiritual understanding, or at least develop more concerns beyond immediate gratification. Although a few grinch bots may play a minmal role in the grand scheme, any lowering of time preference coupled with greater focus on the virtues embodied in Christmas traditions would be a cultural improvement.
The attacks on the grinch bots are understandable; they are an obvious target for the economically illiterate, and going after them makes excellent political hay for a senator looking to expand the state’s regulatory powers. Which of these best describes Schumer is debatable, but the above analysis clearly demonstrates that scalpers in general and these computer programs in particular should be praised rather than denounced.