The Market of Lemons for Sought After Sneakers
The “market for lemons” appears in unexpected areas of the economy, including the market for limited release sneakers. Ever since the release of the legendary Nike Air Jordan 1 in 1985, exclusive sneakers have been a defining market in the fashion industry. In recent years, they have exploded in popularity due to social media marketing and celebrity endorsements. Pop culture figures like Travis Scott and Kanye West collaborate with athletic sneaker companies like Nike and Adidas to create exclusive releases of their shoes, with scarce supply. There often isn’t anything special about these sneakers functionality wise— they are created the same way as their cheaper substitutes. But due to their limited quantity, unique designs, and social endorsement the market prices for them are extremely high. The retail value for these shoes are usually a reasonable amount, maybe 200 or 300 dollars, but resellers use online bots and other techniques to buy these shoes in bulk and then resell them online for up to thousands of dollars.
This scarcity has driven an unethical area of production- the market for fake shoes. Factories in China which produce fake sneakers get access to proprietary information from the official factories (illegally, of course), which allow them to create near perfect replicas of these limited release sneakers. These copies are surprisingly high quality, on a first glance and even having them in hand you would struggle to figure out they were fake if you didn’t know what you were looking for. These are the “lemons” of the reselling market- people unethically sell these replicas as if they were real when in reality they are fake. This produces a lot of problems in the sneaker market- the first being that people pay for shoes that they think are real but in reality are fake. This also hurts legitimate sellers, as marketplaces have loosened up their chargeback policies so unethical buyers can purchase legitimate shoes, claim they were fake and issue a chargeback, and keep the shoes. The value the buyer and seller place on fake shoes would be more than 0 (which is the value we used in our analysis of lemon cars), since fake shoes are still perfectly functional- but their value is significantly less than the real versions.
With enough fake sellers, the legitimate sellers could be driven out of the market and the market could collapse according to our analysis of these markets, but there has been a good deal of market innovation to solve this problem. One of the first and largest companies founded to fight against this issue is StockX, a company which acts as a middleman between the buyers and sellers. StockX is a marketplace where sellers can put up their shoes on premade listings, for people to buy through StockX. When someone buys a pair of shoes, the seller has to ship them to the StockX headquarters, while the buyer’s payment stays on hold. StockX will then check the shoes to make sure that they are real, and if they pass their authenticity check they will send the shoes to the buyer and release the payment to the seller. The buyer then cannot claim that the sneakers are fake and try to issue a chargeback, so this protects both the seller and buyer. StockX takes a small percentage based fee from each transaction to generate revenue and turn a profit. Due to this safety, StockX’s platform has blown up in the last few years and they have become a staple in the market to sell expensive shoes. They’ve even expanded their business into different sectors like luxury watches, game consoles, clothing, etcetera. All of these items follow the same authentication process, and have largely solved the problem of fake shoes, at least on online markets. StockX isn’t perfect, they’ve made the news a few times for their authentication process failing and customers receiving fake shoes (the fakes are extremely hard to differentiate!) but they largely operate without problem.
The StockX verification tag, which has been replicated by Chinese factories
Since StockX took over the market for limited release sneakers, there has been a slew of market responses to their business model. Other companies have copied their authenticity review process, namely eBay. Now when you list an expensive pair of shoes on eBay you can sign up for them to be guaranteed authentic. Chinese factories which produce fake shoes have also become keen to these authentication services— StockX provides a plastic green “verified” tag with every pair of shoes they verify, so factories have started including replicas of this tag with their fake shoes. People then go on to sell these shoes on other platforms claiming that they have been “StockX verified”. As we can see, the market for sneakers turns out to be unexpectedly complex, but market solutions have been enacted to attempt to solve the issue of the market of lemons, and have been largely successful.