Internet Causes Deflation – Part I
What happens to the price of new things when you can get absolutely anything used?
Any frequent eBay user has done something like what I did last month. I decided to upgrade a creaky 2000-vintage Dell server with 5 new hard disks. Each disk needs a little mounting tray, made only by Dell. Total cost to buy the trays and disks through Dell is about $1,000.
Enter eBay. After a 5-minute search, I found a guy in Arizona selling the exact same thing for a total of $75, including shipping. How does the guy in Arizona do it? He buys and disassembles ancient Dell servers, adds overstock new hard disks purchased in bulk, and resells to guys like me. EBay is almost perfectly competitive, so prices are driven nearly to marginal cost. Total saving: 92.5%.
EBay is still growing fast, of course. What happens between now and the equilibrium point, someday in the future, when everyone routinely buys and sells used items that way?
Prices on all readily shipped manufactured goods appear likely to fall in real terms. The longer an item lasts, the farther the price seems likely to fall, as the market is saturated with an ever-growing supply of used items.
Given the global imbalance in manufacturing these days, you might interpret this as great news for the US, and terrible news for China. What happens to China’s toy manufacturers (which now make 85% of all new toys worldwide) if parents suddenly start buying used toys for Christmas? Don’t laugh — it’s still very early in this transition. Culture can change in unexpected ways when presented with huge financial incentives.
If something like that happened, toy makers would be forced to compete on a large scale with their own past output. The results aren’t pretty. Manufacturing overcapacity. Falling prices. Intense pressure to innovate and automate. It’s a consumer’s dream and a manufacturer’s nightmare.
Naturally not every product works as a used item. But this force is so powerful, and its effects so far-reaching, that it might not be such a bad thing that manufacturing is all going offshore…