Resellers vs. Retailers

An important component of the sneaker reselling market is the constant war between resellers and retailers. Resellers constantly develop new techniques and software to hoard releases, whereas retailers constantly invest to develop ways to stop resellers. The preceding image is an example of this. On May 29th, resellers using the bot SoleAIO hoarded 90% of the stock on the Shopify store Kith with the use of artificial intelligence to auto-solve captchas. As a result, its users hoarded the majority of the stock sold via a retailer mounted on the Shopify platform, and Shopify's Chief Technology Officer Jean-Michele Lemieux was put on notice, and indeed, he made it public. The next release, Kith used a different type of captcha, SoleAIO's competitive advantaged vanished, and things "evened out."

A question that baffles me is the economics behind stopping resellers, especially when sites have to heavily invest in achieving it. Let me explain. From the retailers' perspective, resellers make their life much simpler: the stock sells out in seconds, and resellers carry with the supply-chain costs of managing inventories and finding buyers. Retailers would not even have to estimate the demand and figure out how many pairs they will deal through their site, as resellers would purchase them all regardless (yes, you would be surprised at how resellers purchase everything, including $5 dollar profit "bricks"). This is definitely an operative advantage for the retailer. So why do the retailers invest in diluting this advantage?

The main answer I find when I talk about this in the sneaker community is that it has a social purpose, which is, allowing the final consumer to get their sneakers for "the cheap," this is, bellow the resell market price. This explanation, however, is not satisfactory in my opinion, as I believe that the resellers play an important social role in the market, by bringing the pairs to the consumers with the highest willingness to pay, similar to how a first-degree price discriminating monopoly maximizes the social surplus. 

For concreteness, suppose that the valuation that sneaker consumers have goes from 0 to 1, after accounting for the retail price. Also suppose that there are not enough pairs to satisfy the demand. To see my point, consider an equal number of consumers with each valuation. If resale does not exists and consumers buy sneakers on a First-Come-First-Serve (FCFS) basis, a consumer with a valuation of 0 is equally likely to end up with a pair than one with a valuation of 1. This is inefficient from a social welfare perspective. The reseller, in fact, centralizes the pairs and allocates them to the users with the highest valuations, maximizing the social surplus. The tricky part, however, is that the reseller, in the process, extracts the surplus through the resale margin. If sites were worried about social welfare, and about who extracts the rents, wouldn't they be better off auctioning the stock?

So the next potential explanation is that the way the resellers extract the rents from the final-use consumer is unfair, especially because the use of bots yields a competitive advantage (it is near impossible to buy release sneakers from the browser in your house). However, this is misleading as well, as sneaker botting is expensive and requires significant investment both in time and money: resellers that consistently buy 3 or 4 pairs per release have monthly costs of around $1500 dollars, with the initial investment of a bot, at around $6k dollars. The profit achieved with that monthly cost, considering that the average pair has a profit of around $35 dollars and that there are 3 releases per week with those characteristics, is around $500 per month, or a Return on Costs of 33%. In my opinion, sneaker botting is just capitalism in its purest form, especially because there is free entry and exit to the reselling market. 

To put a final question mark on the puzzle, there is the case of Footlocker Group, one of the biggest retailers in the sneaker market, which just invested $100 million dollars in GOAT, one of the top reselling marketplaces. According to the company, their goal is to accommodate their consumers that want to part-take in the secondary/resell market of sneakers. In my eyes, it looks more like "they want to capture the rents resellers get by not letting them hoard pairs and selling directly to the secondary market." However, GOAT is sourced from resellers that depend on... wait a minute, you are correct! being able to purchase from Footlocker. If this is correct, it seems that Footlocker's behavior is extremely intricate for the ultimate goal that would be to become a reseller directly. My best guess is that it is a strategy that allows them to overcome legal limitations with the big manufacturers like Adidas and Nike, which set the retail prices and probably impose restrictions to what they can do with the product.