Restricting Speculative Reselling: When How Much Is the Question

Speculative reselling has long existed in many markets. Speculators purchase products that are in limited supply to resell at inflated prices later. A somewhat puzzling observation is that although firms often impose restrictions on speculation, we rarely observe actions that completely eliminate it. This paper explains why and how an intermediate level of restrictions on speculative resale may be optimal for the firm purely from the perspective of the firm's most desired amount of such resale, that is, without reliance on the decision space constraints. We consider a firm with limited capacity and consumers deciding whether to buy the product in advance (before their individual valuation uncertainty is resolved) or to wait at the risk of an increased price or sold-out product. We find that consumer willingness to pay in advance and the firm's profit may indeed be maximal at an intermediate level of restrictions on speculative reselling. Extending the model to allow consumer-to-consumer resale, we obtain that in our model, whenever an intermediate level of speculative reselling is optimal without the consumer ability to resell, this ability would hurt the firm. This may further explain why resale restrictions may be formulated in such away that only knowledgeable resellers (speculators) are able to circumvent them.

Automated summary

This paper explains why an intermediate level of restrictions on speculative resale may be optimal for a firm from the firm's perspective. It shows that consumer willingness to pay in advance and the firm's profit may be maximized with such restrictions. Additionally, the model suggests that consumer ability to resell may harm the firm, supporting the formulation of resale restrictions that only knowledgeable resellers can circumvent.