My first post, available here was intended to introduce the concept of Consumer Surplus and to drive home the point that every collector values individual cards/products differently. I know that this conclusion seems obvious. Bear with me, as it is the crux of the entire secondary card market that is primarily driven through eBay.
Unlike a traditional market, in which a producer like Topps or Upper Deck tells us how much a pack of cards is worth through Suggested Retail Prices, eBay is a market based on Auctions in which, by definition, the highest bidder wins. This can lead to a number of peculiar results, which is, in fact, what led me to begin on this series in the first place.
At its core, the “value” of a particular card can adjust in accordance with two mechanisms, ultimately resulting in Price Stabilization. This stable price represents the true market value of the card, or, how much the card is actually worth. It is worth noting, that the value of cards can change over time. This was as true in a pre-eBay era as it is now and can be related to the desirability of a particular player, or set or the addition of information regarding the card’s scarcity etc. eBay has simply helped make this process simpler, by providing real-time price feedback and card information that was previously unknown to the collector.
Two mechanisms eventually lead to price stabilization on eBay, and they should be familiar to all of us. Deflation (declining price) and Inflation (ascending price). I will tackle them separately in the next two posts.
Deflation: The Curious Case of Armando Galarraga
In 2008, Topps guaranteed a game used card in each Series 2 and U&H $20 blaster from Target. Although odds of pulling a particular card were available on the side of the box, this information was not available to anyone who didn’t purchase a blaster themselves. One of these cards was a relic card of Detroit Tigers rookie Armando Galarraga. There are a series of groups of people who would potentially be the “end user” for this card (ie: want this card for their collection): Detroit Tigers Collectors (esp. Topps Tigers collectors), Armando Galarraga Collectors, Topps Master Set collectors, Game Used collectors and Rookie Collectors, for example.
We can roughly order which groups would desire the card the most: Galarraga collectors and Tigers collectors would be on top, followed by Master set, GU and RC collectors. The logic is that there are few substitutes for Topps Tigers and Galarraga collectors, whereas the Master set collector has other cards from the same set to chase and the GU and Rookie Collectors have other cards from other sets to chase.
By this logic, we can make a simplifying assumption that Tigers/Galarraga collectors would pay the most for this card, followed by the other groups, respectively. Let’s take a look at a modification on yesterday’s graph:Just like yesterday’s graphic, buyers on the left of the curve value the card more highly than buyers further to the right. If sold at the True Market Value (equilibrium point) they would be rewarded with a large consumer surplus (feel like they got a good deal). In this case, the “price” of the card is unknown without an SRP. Since nobody tells us how much a card is worth, it is up to us to figure it out!
Clearly, each collector’s individual valuation of a card will go a long way towards determining a final market price. If only it were that simple. As much as we decry the abundance of serial numbered cards as a way to create artificial scarcity and increase prices (it is, and it does) it removes one major barrier from achieving an efficient outcome: Information Asymmetry.
I know that a card #/99 only has 99 copies. You know that too. So does everyone that sees the card or views the listing. What I don’t know, is how common an unnumbered card is when it appears on eBay (notice, that “p” is not the only unknown in the above graphic, “q” is too!). I claim that this Information Asymmetry is THE SOURCE of almost all price fluctuations that we see on eBay prior to achieving price stabilization. As humans, we need information and context to help us make decisions. When there is none the outcome is very erratic indeed. And that brings us back to Armando…
For weeks after its existence was discovered, people like me and the folks over at the Detroit Sports Collectors Forum scoured eBay for this Armando Galarraga relic card. Even after returning from card shows, no Armando could be found. Finally, one appeared on eBay. After a furious last hour it sold for $21—that’s right, the guaranteed card from a $20 blaster. In the next few weeks, two more appeared and sold for $21-23. The buyer of the third gave this justification:
I "won" the other auction today for $21 and change. Way more than I wanted to spend on this card but it's better than a wild gamble on a $20 blaster box and ending up with a bunch of common doubles that I don't need.
This new auction may be "yet another", but that's still a grand total of only 4 of these cards (3 white border, 1 gold [sold for $9.99-ed.]) that I've ever seen, leading me to believe it's a very short print. Perhaps just trying to make myself feel better about spending $21 but at least it's one step closer to closing out 2008
A month later, two more of these cards have ended up on eBay. The 4th sold for $13. The 5th sold for about $8. So what happened here? In a case of textbook economics, the people who valued the cards the most won the first copies, albeit at a relatively high cost. It is no coincidence that at least two of them were members of the Detroit Sports Collectors, a group that we judged would value the cards the most. After those initial cards were gone, people with more moderate valuations started winning, resulting in major price reductions. The last card yielded the first sensical result. By selling at $8, the card was now cheaper than a Gold Parallel version of the card #/99. While the price may not have stabilized yet (a search of "retail relics" on eBay as of 1/14/09 shows four cards priced at or below $0.99 and buy it now prices ranging from $2-5) we can clearly see how information asymmetry exploited the individual values of collectors who valued that card highly for their collection. Although they were left with little or no consumer surplus, they did win the card and walked away happy.
That is what eBay is designed to do. As an auction format, it is designed to make you bid up to your maximum value for a card. It is no coincidence that eBay actually instructs you to do this. If everyone bid their maximum value for a card, then the person who values the card the most would get it. That is an efficient outcome, although that is not always what happens. In a scenario like the one we just discussed, this can lead to high prices at first, which gradually lower and stabilize—something that we all have had experience with.
Since this is already very long, I will stop there. In subsequent posts, I will discuss a situation in which the price of a card will get more expensive the longer you wait and (finally) how we can determine what a card is actually “worth.” I will also explore ways to exploit the system, how knowing all of this can help you make important purchasing decisions (of packs too!) and how we, as bloggers, can help save the world.
Note: I still need this card for my collection, so if anybody has it let me know!