What are the economic principles behind a company continually selling a product for well under its market value. Continually here expressing that it does not appear to be some short term method to bankrupt competitors.

I am talking about companies that sell products that can be routinely resold on the second hand market for many times their initial cost.

I recently watched a documentary on Nike, where it describes their humongous Limited Edition department and how they sell shoes for a few hundred dollars a pop to client base willing to wait in line for weeks and pay thousands of dollars for any one of their limited editions shoes.

It describes Nike underselling their shoes by 1000% in both quantity and price. But Nike is hardly the only example, a few years ago, anyone who wanted to buy a Nintendo Wii could be certain of making a profit reselling it.

  • $\begingroup$ Does Nike sell directly to final consumers, or rather to wholesalers? $\endgroup$ – Luís Henrique Sep 10 '18 at 12:56

1st of all, you should distinguish cases from the Nike case and others, if any:

Since Nike sells only a tiny portion of its shoes "irrationally" it cannot be seen as market value - equilibrium price, but rather as marketing expenses

Think that simply generating a rare nike products market adds value to the brand and motivates consumers to prefer nike

Regarding any other case: they can either be "dumping" - that is selling at a loss in order to throw your competitors, selling above your *average * cost, meaning making a profit, maybe fightinv for market share, or being cross funded by different activity, to hurt competitors in the subject market

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  • $\begingroup$ One could argue they are not selling irrationally, but using diferentiation to sell a tiny portion of their shoes to the few people who are in the highest level of demand, thus capturing that profit. $\endgroup$ – JoaoBotelho Sep 11 '18 at 10:00
  • $\begingroup$ not really. these sales are a tiny fraction of nike's total sales, if you consider design and factory specific costs, I don't know if selling any shoes in low quantity ia profitable... $\endgroup$ – Guy Louzon Sep 11 '18 at 11:10
  • $\begingroup$ Differentiation doesn't imply that they will have a whole factory built for the special edition shoes, or that they'll make it by hand. Think of the marginal cost of producing a special edition vs the marginal profit. My argument is that calling them irrational is incorrect as it's not a choice of paying more for the same thing: for them, there is a difference. They are just not the majority of the consumers. $\endgroup$ – JoaoBotelho Sep 11 '18 at 21:51
  • $\begingroup$ as I wrote in my answer, the special addition shoes costs should be written as marketing expenses $\endgroup$ – Guy Louzon Sep 12 '18 at 3:38

Consider what a downward sloping demand curve means. The first customer is willing to pay a higher price than the second customer and so on.

Concretely, consider a first customer who is willing to pay \$1 million and a second customer willing to pay \$500 thousand. So if Nike prices at \$1 million a pair, it makes one pair and sells for \$1 million. If it prices at \$500 thousand, it makes two pairs and sells for \$1 million total. This is not discriminatory pricing. With discriminatory pricing, Nike would sell the first pair at \$1 million and the second pair at \$500 thousand, for \$1.5 million total.

Now consider what happens if we add a third customer who is willing to pay \$100 thousand. If Nike sells at that price, it has three customers and sells for \$300 thousand total. It was much better off selling at either \$1 million or \$500 thousand. But what if there are more customers at \$100 thousand? If we add ninety-seven more customers at \$100 thousand, Nike can sell a hundred pairs for \$10 million total. That's more than it made at a \$1 million price point.

Your assumption is that if Nike sells its shoes for \$300 and there is someone willing to pay \$2000 for a pair, that Nike could sell at \$2000. But if Nike sold at \$2000, many of its other customers would drop out. That's not a market price; it's a specific customer price. And if Nike sells less than a seventh as many shoes at \$2000 as at \$300, it makes less money even with the higher price.

To explain why they price at a point where they run out rather than leaving a slight excess. Because forcing people to make a \$300 or no shoe decision may be more successful if the person knows that the shoe won't be available tomorrow. They may actually sell more shoes if they are expected to run out than they would if the shoes were guaranteed to be plentiful. Because people can't procrastinate making the choice.

That's not to say that there aren't marketing reasons as well, but that we don't necessarily need marketing to explain this.

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