The Perils of Excess Demand

According to an article in the Orlando Sentinel, a riot broke out in the Florida Mall parking lot. The cause of the riot was not that their team had lost the Stanley Cup (that’s a Canadian thing), but because Nike was releasing a new shoe. Yes, a riot over a new shoe.

The shoes in question, a limited edition Nike “Foamposite One” has a galactic themed upper as a tribute to the nearby space industry in Titusville. The shoes were to be priced at $220 per pair and that is what led to all the problems.

Whenever an item is priced below the market clearing, or equilibrium price, the number of willing buyers exceeds the number of units offered for sale. Quantity demanded exceeds the quantity supplied. There exists an excess demand.

Shortages are common in markets that are affected by government price controls. For example, rent controls create chronic shortages of affordable housing and food price controls in Venezuela have created shortages of foodstuffs. Under-pricing of products without government regulation is not uncommon but it is usually to entertainment events such as concerts and sporting events. While the reason for under-pricing events is subject to debate, it has spawned an entire industry of amateur and professional scalpers. These people acquire tickets to events that are under-priced and resell them at prices that clear the market. (The concept of an equilibrium price for a ticket is difficult since each seat is somewhat of a unique product.)

When an excess demand exists, competition among buyers tends to push prices up. This increase in price would normally induce firms to produce more. This, of course, isn’t possible if prices aren’t permitted to rise or if firms can’t or won’t increase output. In these cases the price will rise to whatever consumers are willing to pay which is often well above the original price. According to the article, some prospective buyers were expecting the shoes to resell for as much as $2200.

A purchase price of $220 and a resell price of $2200 gives people a lot of incentive to get a pair of shoes when they go on sale. Economic theory suggests that people will expend up to $2000 in resources multiplied by the probability of successfully acquiring a pair of shoes. For example, if there is a 20% probability of buying a new pair of Nikes and the expected profit is $200, individuals will expend up to $400 in resources over and above the $220 list price of the shoes.

The article quotes one person as saying they flew in from New Haven (Connecticut) at a cost of ‘a couple of hundred dollars’ to buy a pair to resell. Others waited outside the mall for several hours waiting for the shoes to go on sale. That was time that could have been devoted to labour or leisure.

In the end, the police were called in to disperse the crowds and no one got a pair of shoes. Nike did get a lot of free publicity however, and will no doubt have larger crowds next time they try and launch this particular edition of their shoe.

Michael S. Leonard
Kwantlen Polytechnic University
Surrey, BC

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