Saturday, February 15, 2014

The Law of Supply and Demand and Nike’s New “Red October” Air Yeezy II Sneakers.

On February 9, Nike announced via Twitter that it has a few of the new Air Yeezy 2 Red October sneakers.  They sold out in 11 minutes.
Nike’s goal is to make the most total profits – from all their shoes and products.  They initially create a shortage for this new design by releasing only a limited quantity. But this doesn’t move the needle on their Profit and Loss statement.  The demand for the new shoes hopefully then creates a buzz, plenty of publicity and the chance to sell the new sneakers by the truckload.
Nike does not benefit initially from the higher prices in the secondary market like eBay (where one capitalist tried to resell his pair at about $16 million), but the perceived shortage provides a media spotlight on the new shoe and plenty of free publicity. It also helps drive the demand for more shoes that Nike will sell later.
Nike’s goal is to make lots of money from the new shoe line and to do that they will have to sell many more shoes and their total gross profit will be (the number of shoes sold times (wholesales shoe price less the cost of production)).

But here’s the rub.  The more shoes they sell, the less scarcity.  In the long run you can’t have both scarcity and sell an infinite number of shoes.  In a free market, prices self-correct. 


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