Speculative Reselling: How Far Should It Go?

Why would a company turn a blind eye to this “black market” activity even though there is a risk it may reduce the availability of their product in the launch phase and later, inflate the price so much that some consumers give up on their purchasing bids altogether? Do companies benefit from speculative reselling? If a company can benefit from speculative activities, why would they restrict it at all?

These are perplexing questions that researchers attempted to answer in their research paper titled Restricting Speculative Reselling: When ‘How Much’ Is the Question. The paper was written by Liao Chenxi, Assistant Professor at the Department of Marketing at The Chinese University of Hong Kong (CUHK) Business School in collaboration with Prof. Dmitri Kubsov at the University of Texas at Dallas.

Besides finding answers to the above questions, the researchers also sought to find out the level of speculative reselling a company is willing to allow, and the level of total capacity it will arrive at, in order to achieve optimal profits.

A Symbiotic Relationship

To do this, the researchers built a theoretical model simulating a market where a company with a monopoly on a product launches a new item. In this market, the company does not drastically change the capacity of production over time. Instead, it uses a limited capacity as a tool to create the perception of “scarcity” in consumers’ mind. This facilitates the phenomenon of “buying frenzies.”

There are two distinct periods in which the new item is sold: the initial sales period and the phase immediately after this. In the initial sales period, consumers don’t have a clear idea of how they will like the product because no one has used it yet, or/and some uncertainties (e.g., weather on the day of the concert) can only be resolved in the second phase. Consumers naturally want to hold out on their purchase and wait till the product has been out in the market for a while or until the second phase.

But some consumers may rush to make the purchase during the initial sales period because they fear that the product may be sold out quickly. When speculators are in the picture, the purchasing dynamics changes accordingly. “The mere existence of speculators may push consumers to buy the product immediately.” says Prof. Liao. “This is because speculative activities may artificially jack up the price of the product. So, instead of waiting too long and ending up paying a higher price to the speculators to secure the product, some consumers will prefer to make their purchase immediately.”

How would that dynamics impact the company? Prof. Liao explains with a hypothetical example: “If consumers unanimously wanted to wait until the end to buy the product, perhaps only five would end up buying it. But if they felt the pressure to get it now, perhaps 10 would end up buying it. When the pressure to purchase immediately is present, the company benefits from selling more of its product. As we have seen earlier, the presence of speculators creates this kind of pressure and further fuels the buying frenzy.”

As speculators tend to snatch up a proportion of the capacity early on in the initial sales period, which helps to increase the product scarcity, the company may decide to adjust its capacity slightly upwards in the planning stage so that there will be more to sell to both speculators and those consumers who are willing to buy immediately. This is likely to result in increased sales volume.

Compared with a market without speculators, the company doesn’t have to restrict its capacity to the lowest possible level in order to create buying frenzies, says Prof. Liao. “The speculative activities will automatically ramp up the buying frenzies. That’s why companies actually benefit from speculators, even though they may appear to compete directly with each other. It’s a win-win for both the company and the speculators. Essentially, they have a symbiotic relationship. That solves the puzzle of why companies turn a blind eye to speculation – to a certain degree.”

Restricting Speculative Competition

After the initial sales period, consumers have digested early shoppers’ valuations of this product and will have decided if they are willing to pay the same price or a higher price from speculators if the product is sold out. During this time, speculators may try different tactics to discern how much individual consumers are willing to pay, and in the process charge different consumers different prices.

Another scenario that can happen during this second phase is that speculators may compete among themselves to maximise profits. In such a case, the company’s profits would drop.
The more competition there is, the more the company is motivated to restrict speculative behaviour to protect its profits. However, the researchers found that an intermediate level of speculative activity is still helpful in boosting the company’s profits.

“It’s a balancing act,” says Prof. Liao. “While a certain level of speculation can help the firm create a heightened sense of consumer uncertainty and motivate them to make purchases faster, too much competition among speculators can have the opposite effect. Prices will drop and fewer consumers end up wanting to buy the product at a high price from the company.”

Another scenario this study considers is that, some consumers who have purchased the product at the launch period may want to resell their goods during a later period. “When this happens, our model finds that this company’s profits will absolutely suffer, ” says Prof. Liao. “Unlike speculators, whose very existence tends to drive up the price of products in a spot market and encourages consumers to bring forward their purchases, resale by consumers tend to have the opposite effect.”

“That’s because prices in the consumer resale market is lower as more consumers resell the products, and that’s why for some companies they should actively come up with strategies to discourage consumer resale at all costs.”