When it comes to online shopping, you might be competing with some super-fast, greedy bots.
Bots are a special and intelligent type of software. Much faster than any human sneakerhead could ever click on the right shoe size and enter their credit card number, bots can dive in and buy it all in the blink of an eye. Then the people who control the bots will put those exhausted shoes on the resale market for much higher prices.
But robots don’t just buy cool sneakers. They buy the concert tickets you want, so they can then sell them to you at an outrageous price. At the start of the COVID pandemic, robots were buying hand sanitizer and face masks. Later, they reserved all the vaccine reservation places. Everything in high demand with a very limited supply. This is an opportunity for bots to become greedy grabbers and to grab the market.
On Friday’s episode of What Next: TBD, I spoke with Eric Budish, professor of economics at the Booth School of Business at the University of Chicago, about the dangers of bots and how to fix the broken system. .
Seth Stevenson: What are the incentives to develop and use robots for online transactions?
Eric Budish: The incentives are to use technology to buy the mispriced asset on a large scale. You see in the sneaker market you see in the ticket market I have documented this in the context of the financial markets. More than 20 percent of the volume of the financial market is made up of high frequency races. In a typical race, the time difference between winner and loser is between five and ten millionths of a second. It’s just like blazingly fast. Market structure rewards speed. Speed is not a form of constructive competition, but it is what the market induces.
This phenomenon, where people buy all the tickets to an event and then scalp them at a higher price, or all buy a limited edition product and then resell it for a profit, relatively new? Or is this something that has also happened in the past?
I have found examples of this phenomenon dating back to a reading by Charles Dickens in the 1860s. Dickens was giving readings. Tickets were $ 2, and $ 2 was a lot of money back then. But there were reports of a resale value of $ 20 or $ 30 a ticket. There have been reports of a young boy being paid in gold for a good place in the queue. It’s the same economy, without the scale of the Internet. So no, this is nothing new. Sneakers is a newer thing simply because people weren’t collecting sneakers a hundred years ago.
Has the internet fundamentally changed the dynamics of this?
The internet has changed the technology of banknote speculation: the scale with which you could hoard banknotes in the primary market and then easily resell them in the secondary market. What used to be “stand in line and buy tickets” has now become “build a bot and buy tickets all over the country.”
Then the aftermarket, where you resell the poorly priced products, has also become much easier to use. In the old days, if something cost $ 50, but was worth $ 200, there would be a lot of shady brokers who would get the $ 50 tickets and then sell for $ 200, but a lot of fans would also get $ 50 tickets and be very into it. happy. But if all tickets are picked up by ticketing robots for $ 50 and then resold for $ 200, it does no good to the team or the artist. The internet has sort of shattered the ability to primarily offer your tickets to your fans at low prices.
Bots are a symptom of an error. There are several different versions of the error you may have made. The first is that you set the price too low or you set the quantity too low. You left money on the table. Or, if your intention was to leave money on the table – out of generosity of heart, or because you are a long-term cautious businessman and want to give value to your fans – if you choose to price too much. low, then the mistake you made is letting below-market products go to bots, not your fans.
When sellers don’t increase the price of their products, it seems like what they’re actually doing is just giving bots free money, right?
Yes. I think the other interesting option is what the wonderful late economist Alan Krueger called Garth Mode. Garth Brooks had an idea of the fair price for a Garth Brooks concert. $ 75, I think. And he just announced, “I’m going to play as many gigs as there is demand to see me at $ 75 a ticket.” What it does is it caps the resale value, because you know there will be just one more gig that you can buy tickets for. This is a great way to put an end to speculation: just produce as much as the market will bear at the price you think is a good and fair price. Sneaker companies could do it. They could simply produce more copies of the in-demand sneakers. But the choice to make it a limited edition and too setting a price below the market is one that, as an economist, is just hard to understand. It doesn’t make perfect sense.
It’s like Ferrari is pricing a Ferrari at $ 5,000 and you’re like, honey, I can have a Ferrari. But of course you can’t, everyone buys them and there is only one aftermarket where they cost $ 180,000.
Yeah, and you look at Ferrari and you’re like, what are you doing? It is enough to set the price of a Ferrari for it to be an appropriate equilibrium price in the market. There is no point in pretending that the price is 5,000 if it is 180,000. It will just create a lot of shattered hopes and dreams.
So how do you create rules that prioritize the emotions of the person who just wants to see the concert or buy the shoe and enjoy it?
I think Garth mode is a clear answer. If you want to set a low price and your fans all have the opportunity to buy at that price, increase the quantity. Just do more shows, produce more cool sneakers, for everyone to have access to. The other type of response is more difficult to execute, but is to take great care in awarding the reasonably priced, low-priced property directly to your fans. Airline tickets have names on the ticket; I cannot resell my ticket to you at an additional cost. Airline tickets are completely non-transferable. If you did, then you could just sell tickets to your fans for what you think is fair and close the resale market.
These platforms where the secondary sales take place, like StubHub or eBay or wherever people resell their limited edition sneakers, do they bear the responsibility? Is there anything they could do to improve it?
I hold them responsible for lobbying to preserve flawed rules. I think the thing to note about StubHub and the secondary markets is how much of the pie they manage to get their hands on. StubHub and SeatGeek and all of those sites, their fees are so high that they actually make more profit on the resale than the bot itself or the broker itself. They want there to be a lot of brokers who develop great bots to grab poorly valued assets to resell. And then they take this gigantic toll.
They at least provide some sort of service. They provide a platform where, if you’re willing to pay the highest price, you can go out there and pay the highest price. But what value do scalpers bring?
You are absolutely right. In a perfect world, there would be a resale market, or something, where if you really wanted to go to an event and were willing to pay through the roof to get there, there would be a price. Someone would make a deal out of you.
This is the situation we find ourselves in, where most of the tickets go through bots and then through the secondary market, both of which have significant fees, that doesn’t make a whole lot of sense.
It all seems to be parasitic behavior. Do these bots bring value to society?
No. It is social wasteful behavior that brings no value to society. When you see the technology being used for these little relative advantages, it’s a symptom of competition on a bizarre level. Economists call it social wasteful behavior or rent-seeking behavior. I try to point out to my students the difference between value creation strategies and value capture. The companies we admire the most grow the pie. They invent new things. They improve the products. They create value. And a lot of that stuff is about capturing from a fixed pie, or even reducing the pie. Parasite is not too strong a word.
If I put you in charge of the universe, but told you the only thing I want you to solve is this problem with the robots buying all the cool sneakers, what would you do?
If Nike really wants to sell only 50 copies of certain sneakers, they should sell those sneakers to fans who have done charity or won essay contests. Something noble and a creator of value for society. Competition on a different dimension, other than price and other than kicking, is more socially useful.
Right now, the competition for the regular person is clicking faster than a bot, which you will never win. But you could beat a bot in an essay contest.
Yeah, you could beat a bot in an essay contest. I just find a constructive dimension to compete on. This would be a way of rethinking the market to produce competition that creates value, and not competition that destroys value.