Nintendo could beat NES Classic scalpers in two ways (but probably won’t)

It’s nearly impossible to find an NES Classic at retail. The hardware sells out instantly online, and shipments to physical stores are sporadic and rare. Many of the systems are ending up on the secondary market for many times their retail price. News of when they will be available brings in remarkable amount of traffic.

The best way for Nintendo to fight back? Raise prices.

Wait, what?

Secondary markets exist when the retail price for something doesn’t match the price people are willing to pay for it, usually due to scarcity. Sometimes that scarcity is either managed slightly or completely artificial, but the end result is the same.

Not everyone who wants something is able to buy it. They are willing to pay more than the set price, and this allows third-party resellers move in and make a profit.

We see this with concert tickets all the time, and we’re beginning to see pushback when people blame the scalpers.

“As I have written many times before, economic logic tells us there are only two conditions that can create a secondary market for concert tickets selling above their list price.” Mark J. Perry, a scholar at AEI and a professor of economics and finance at the University of Michigan's Flint campus, wrote in a blog post. Here are those reasons, in his words:

1) the number of concert tickets being offered for sale is too low relative to the number of fans who want to attend the concerts of popular musicians, and/or 2) concert tickets must be under-priced relative to their true market price. And I would suggest that both of those conditions are completely under the control of the artists, and their managers and promoters, in which case we are led ineluctably to this conclusion: musicians and their representatives who are 100% responsible for the conditions that guarantee a secondary market where concert tickets to Adele to Beyonce concert are sold above their face value.

Policy won’t change this, nor will laws. If you want to kill the secondary market for concert tickets you can either add more shows, removing some of the scarcity, or you raise the price of the tickets you’re selling directly to fans to make sure the artists and management keeps the cash, not the scalpers. Or you just scalp them yourself.

“I’m going to tell people, a lot of artists already do it. I think I’ve been guilty of it in the past, too,” Kid Rock once told Piers Morgan. “We take some of our tickets, we put them on StubHub, overcharge with what the market determines they’re worth … I’m taking 1,000 of them and I’m scalping them.”

Photo by Rick Diamond/Getty Images

Musical acts aren’t gouging their fans when they charge huge amounts for tickets, they’re just moving the profits away from the scalpers and back to the venue and performers. They could also add more concerts, but that isn’t always an option with older performers. Kid Rock did try this approach, however, and the experiment met with some success.

If increasing supply isn’t always an option, and the organizer of the show isn’t interested in significantly raising the price, the problems become much harder. You can read this interview with Robert Khoo, who used to manage the business aspect of Penny Arcade, about how the company has tried to reduce scalping of PAX tickets without raising the price or adding many more events. He patiently shoots down the “simple” solutions the interviewer proposes, while explaining how successful they’ve been in limiting the impact of the secondary market.

[I’ll note that I was employed by Penny Arcade for two years, but was not a part of any policy conversations about ticket prices nor availability.]

So what does this have to do with Nintendo?

The demand for the NES Classic far outstrips supply, and people are willing to pay more than the $59.99 retail price, so the secondary market is thriving. eBay told us that, as of last Tuesday, the average price for an NES Classic sold on its service was $230.

You could say that Nintendo lost $170 of potential revenue from each of those sales. If Nintendo sold the NES Classic for $230 in the first week, it would have kept the money that instead went through eBay to the secondary market.

Nintendo isn’t likely to do that, for the obvious reasons.

The company could also increase supply, and we’ve argued before that the fact these systems are rare at all is complete bullshit. If Nintendo made more of the NES Classic, everyone would be able to buy one, and the secondary market would be wiped out.

Nintendo is unlikely to do that either, for slightly less obvious reasons.

The value of the NES Classic being seen as a hard-to-find gift for the holidays, combined with the fact that every story about retailers getting more units in stock puts the hardware back in the news, is worth much more than just selling more of them. Nintendo knows the importance and value of its own past, and the NES Classic as a product is designed to reflect those values.

Managed scarcity increases the perception of everything from the hardware itself to the way people view the included games. It’s what separates the NES Classic from the piles of other retro consoles with included games that fill bargain bins. It also creates an environment where everyone benefits, from sites like eBay to enthusiast sites like this one that see huge traffic spikes as people search for the systems.

And those benefits are only going to increase as the holidays get closer. Nintendo is likely already making a significant profit on the NES Classic at $59.99, so the added value it gets from keeping everyone talking about the system is worth more to them than that extra $170 they might get per sale.

So where does this leave us?

Although the reality is that these shortages are likely to continue up through the holidays, I would guess that Nintendo will begin increasing shipments starting in the middle of December. That way, the company can begin selling more hardware, as the value of scarcity is lessened and that of actual hardware sales goes up a bit.

I was able to get a system using a slightly insidious but ultimately benign form of insider trading. I knew that lines for the first night would be easy to manage, due to the fact most people who will be buying one for a gift weren’t even aware the product existed yet. Looking at interest in NES Classic stories also allowed me to see the shortages coming ahead of time. I waited in line for an hour on the first night and grabbed one with relative ease.

My NES Classic is in the basement, however, not on eBay. Nintendo measures value in different ways, and so do I: The value of playing Excitebike with my kids far exceeds the $170 profit I would have made on eBay.