The world of sneakers has transcended its beginnings as mere footwear to a cultural phenomenon, a status symbol, and a multi-billion-dollar industry. Fierce competition is at the heart of this craze – the bidding war for sneakers driven by economic forces like scarcity, market disequilibrium, and status signalling. As a result, sneaker culture has become part of pop culture, with entire events dedicated to sneaker releases and fans willing to pay thousands of dollars for exclusive pairs.
Sneaker
Economics: Supply, Demand, and Price Elasticity
The driving force behind
sneaker bidding wars is a classic economic principle: supply and demand.
Sneaker businesses frequently employ the strategy of artificially limiting the
availability of specific shoe models by making them in limited quantities.
Restricting the availability of trainers can increase the desire among sneaker
aficionados who are interested in owning a unique or special pair. This
approach is frequently employed for exclusive partnerships with designers,
artists, athletes, or celebrities. Illustrations encompass Nike's joint venture
with Virgil Abloh's Off-White brand or Adidas' alliance with Kanye West for the
Yeezy collection.
Price elasticity is the measure of how sensitive demand is to changes in price. Within the sneaker industry, specific products demonstrate greater price elasticity due to characteristics such as exclusivity, buzz, or perceived worth. Consumers are potentially willing to pay higher rates for exclusive or highly desirable trainers, regardless of their original retail price. Consumers' price sensitivity in the sneaker industry is influenced by factors like brand loyalty, perceived quality, and cultural importance.
Fig1 - https://www.linkedin.com/pulse/stock-market-sneakers-5paisa-jezpf/
How does the sneaker market
disequilibrium occur?
This intense competition in
sneaker bidding wars throws the market into temporary disequilibrium. When the
number of shoes produced by manufacturers exceeds the demand from
consumers, it leads to a significant inventory surplus, causing prices to
decrease and corporate profits to diminish. Sometimes, companies may
inaccurately assess the future market for a new type of sneaker and make
erroneous predictions regarding potential demand. This can lead to
overproduction, resulting in a surplus of inventory when consumer interest
fails to materialize upon release. For instance, Nike released a shoe called
the ‘Lunarglide+’ in 2009 and overestimated its potential, resulting in a
surplus of shoes that had to be sold at deep discounts. Ultimately, this can
necessitate selling products at reduced prices, diminishing profits or even
incurring losses.
When the number of shoes
produced by manufacturers falls short of the demand from consumers, there might
be a shortage of supply. Manufacturers may choose not to increase production of
trendy sneakers to satisfy market demand. Instead, they may decide to control
output and employ the strategy of hunger marketing, keeping the product in
supply shortage for a long period and raising its price to maximize profits.
For instance, the Nike and Louis Vuitton co-branded sneaker “LOUIS VUITTON X
NIKE AIR FORCE 1 LOW WHITE" currently sells for £13999. Despite the high
price of this sneaker, some sizes are still out of stock on many platforms.
The
Impact of Resellers on Sneaker Markets
Resellers capitalize on
this disequilibrium. When brands strategically limit the manufacturing of
sought-after styles, they provoke consumer interest. Resellers take advantage
of this dynamic, using sophisticated tools such as bots and multiple accounts to
acquire a significant amount of available stock during releases. This
effectively gives them control over supply, allowing them to resell the shoes
on secondary markets at exorbitant markups that reflect fake scarcity. This
disrupts the natural balance of supply and demand, leaving true fans
dissatisfied and willing to spend inflated prices to obtain their favourite
sneakers. Consequently, brands forfeit potential revenue as resellers take a
substantial share of profits. This self-perpetuating cycle creates a market in
which authentic consumers struggle to find sneakers at retail prices, while
resellers profit from the hype and exclusivity of limited releases. Dealers
supplying counterfeit 'first copies' of famous sneakers complicate the market
even further, undermining the industry's integrity and raising serious legal
and ethical issues.
Sneaker Investment Bubble:
Speculation and Future Expectations
Added
another layer of complexity, some view rare sneakers as an investment. They
believe that limited supply and high demand will ensure their value appreciates
over time, similar to a collectable or a piece of art. This creates a bubble
effect, which occurs when the prices of sneakers are driven up by speculation
and future expectations instead of their intrinsic value. When investors
perceive that the demand for certain sneakers will continue to increase, they
may be willing to pay increasingly higher prices in anticipation of future
profits. This speculative behaviour can create a cycle where rising prices
attract more investors, further inflating the bubble.
While sneaker investments
may offer the potential for significant returns, they also carry inherent
risks. Unlike traditional financial assets, sneakers can be illiquid
investments, meaning that it may be challenging to sell or liquidate them for
cash quickly. Moreover, the prevalence of counterfeit sneakers on the market
poses a risk to investors. As more investors enter the sneaker market, the
potential for oversaturation and a subsequent decline in prices increases,
posing a risk to investors who may be left holding devalued assets.
Sole
Statements: The Social Currency of Sneakers
Beyond the basic economic
principles, sneaker bidding wars also tap into the concept of status signalling.
It delves into the complex world of social currency. A rare pair of sneakers
works as a flashy showcase of wealth, cultural awareness, and membership in the
elite "Sneakerhead" club. It's a fascinating overlay of economics,
social psychology, and cultural trends, where the desire for a coveted piece of
sneaker history transcends the price tag.
As the sneaker market
continues to evolve, it will be interesting to see how these economic and
social factors interplay and whether the sneaker bubble will burst or sustain
itself. Ultimately, for true fans, the passion for sneakers goes beyond the
price tag. It's about the connection to a community, the thrill of the hunt,
and the satisfaction of owning a coveted piece of footwear history.
References:
- https://mckickz.co.uk/products/louis-vuitton-x-nike-air-force-1-low-1a9v86?currency=GBP&variant=43253035827435&utm_medium=cpc&utm_source=google&utm_campaign=Google%20Shopping&stkn=5883239ec6cb&gad_source=1&gclid=CjwKCAjw5v2wBhBrEiwAXDDoJWT_2W7a1Ui-ijTIxJXwVYiMaUoNytGyylh6QYl8sUcEJ__KHqomkxoC8BEQAvD_BwE
- https://www.bbc.com/worklife/article/20180205-the-hype-machine-streetwear-and-the-business-of-scarcity
- https://www.aseponde.com/investing-in-sneakers-stepping-into-the-world-of-footwear-investments/
- https://www.madeinbed.co.uk/art-business-markets/the-secondary-market-how-resales-are-dominating-the-sneaker-market
- https://www.imperva.com/learn/application-security/sneaker-bot
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