Buyouts, Scarcity, and Potatoes

Tweet by SaffronOlive // Feb 24, 2015

finance

For the past couple weeks I've been thinking about buyouts — when a card suddenly disappears from the internet and spikes in price. This has become an important conversation in the finance community and seems to have hit its peak in the past couple weeks. We've had writers blaming Reddit for buyouts, and also the opposite of Reddit blaming writers for buyouts. But perhaps the icing on the cake was when my MTGGoldfish Podcast co-host Chaz messaged me, tongue-in-cheek, saying he had just "bought out" a card after purchasing the last two copies of an older foil listed on TCGPlayer.

As such I would like to take some time today to talk about buyouts and scarcity. I should make it clear from the start: While I will use specific cards that have been bought out as examples to illustrate points, this article isn't about about the individual cards. I don't know who bought out Seance, Magus of the Bazaar, or any of the other cards here, nor do I really care. Instead, I want to talk about buyouts on a more meta-level: what they are, why they happen, and what you can do to protect yourself and your money.

What are Buyouts

Scalding Tarn (Normal Price Chart)

Foil Merieke Ri Berit (Buyout Price Chart)

The prices of Magic cards organically increase and decrease depending on supply and demand. This isn't problematic or unusual; it's actually healthy. Traditionally, these organic price changes create the foundation of mtgfinance. If you can recognize the patterns that make cards increase or decrease in value (e.g. rotation from Standard, Modern PTQ season, seeing more or less play, etc.) and apply mtgfinance 101 basics like spreads and multipliers, you can use these cycles to your advantage and make a bit of money. This isn't much different from other financial markets such as stocks, futures or commodities which, more or less, run on the same principles. When you leave out all of the technical terms, economic theories, and advanced mathematics, what you are trying to do is buy low and sell high.

Intentional buyouts, on the other hand, ignore the pattern and cycle of mtgfinance. These buyouts attempt to create artificial scarcity by decreasing supply. Take Merieke Ri Berit for example. On January 23 she was $10. Two days later she was $200, before settling at $40 — four times her previous price. The massive spike is fairly typical for a buyout. In the case of Merieke Ri Berit, it probably didn't take much to buyout foil copies at $10. She is from an older low-supply set. While I don't have the exact numbers, there were likely not many copies for sale on the internet. I would wager that on January 23, foil Merieke Ri Berit could have been bought out for less than $300 dollars.

Let's say there were 20 foil Merieke Ri Berits on January 23 and you "bought out" all of them, basically cornering the market on the popular Tiny Leaders commander. What do you do next? List a couple copies on TCGPlayer for $200 hoping that someone is silly enough to buy them for 20x what they were yesterday. If you can sell just one copy at that price, you've already made your money back from the buyout and still have 19 copies left. Over the next few days, other people will see the spike and start digging through their binders to find their own foil Merieke Ri Berits. A handful of people will find copies and list them first for $100, looking to undercut your $200 asking price. Then someone will list them for $50, looking to get in under the guys at $100. Seems like a pretty easy way to make a few dollars right? The problem is, this assumes someone is willing to pay the new price for your cards. This is far from given. Now that we've seen an example of a buyout, let's talk about the different types of buyouts that occur in mtgfinance.

Types of Buyouts

Organic versus Intentional

Not all buyouts are an attempt to influence the market. Some buyouts just happen. Over time cards are purchased, and sooner or later supply dries up. While an intentional buyout may or may not seem ethical or moral (mostly depending on your views on capitalism), there isn't any way to control an organic buyout, nor is there a good reason to want to.

An intentional buyout is when a person or group of people decide to buy up all copies of a card to create scarcity, which increases demand while decreasing supply and driving up prices. A few months ago, a group of people on Magic Online were taking this practice to the extreme, buying out bulk mythics like Soul of Zendikar and Surrak Dragonclaw. They were waiting for bots to increase their prices (based on the lack of supply), with the intention of dumping the cards back to the bots at the higher prices. While I can't say for certain, it is likely that the Merieke Ri Berit buyout was intentional given the massive spike on her price chart.

An organic buyout is not an attempt to manipulate the market. Instead of coming from a single person or group, the community itself is responsible. While organic buyouts can show the same spike in price charts, more often than not they look something like this:

Hive Mind (Foil)

Instead of a huge spike, this chart shows a card that is increasing in demand thanks to good tournament performances and Pro Tour Fate Reforged hype. Over the course of a few weeks, foil Hive Minds were bought out, little by little, by both financiers and players. While the end result is the same (supply is non-existent or greatly diminished), the way we got to this result is much different. Instead of ending up in the hands of a single person, these foil Hive Minds were dispersed throughout the Magic community.

Now I can understand the outrage over intentional buyouts because it makes people feel like they are being taken advantage of. This sentiment is not unfounded because being forced to pay $40 for what was recently a $10 card does not seem fair. On the other hand, under the tenets of capitalism, a person's first and only responsibility is to their pocketbook. Given such a tenet, it's hard to say whether this behavior is unethical or wrong (in fact, Rand would probably argue that not buying out a card is unethical).

While it might be ethical in a capitalistic system, this behavior isn't healthy for the economy and it almost always hurts the "little guy." In many ways it's similar to the tactics of the asset-stripping corporate raiders of the 1980's. They would take over a company (sometimes in a hostile manner) with the sole goal of selling off its assets for profit. This tactic would often drive the company into bankruptcy and cost the employees of that company their jobs.

Coordinated versus Individual

While this heading matters much less than intentional versus organic, it's still worth mentioning while we are on the topic. In the world of intentional buyouts, coordinated refers to the organized efforts of a group of people to perform a buyout, while individual buyouts are the actions of one person. In essence, a coordinated buyout forms an oligopoly, while an individual buyouts creates a monopoly.

Scarcity: Real versus Artificial

You probably know by now that I can't resist talking about psychology when the opportunity presents itself, so let me share with you a story about potatoes (that's right, potato psychology) that I stumbled across in Age of Propaganda.

Potatoes have not always enjoyed the popularity that they do today. The French used to believe potatoes caused leprosy, the Germans only fed potatoes to cows and prisoners, and the Russians considered them to be poisonous. It was Catherine the Great of Russia that changed the perception of potatoes with the help of a very simple technique that is still used today: scarcity. Catherine decided to build fences around worthless potato fields and post signs warning the public against stealing potatoes. This caused the potato (which Russian peasants thought were poisonous) to suddenly become a hot item as the typical commoner thought, "Hey, why are they roping off these potatoes? They must be valuable. I guess only the rich get to eat potatoes, but not if I can help it. I'm sick of eating beet soup every day. I want potatoes!!!"

Now potatoes weren't actually scarce in Russia, but Catherine realized that if she could make them appear scarce, she could increase demand and have another cheap source of food to feed the masses. This works because we are conditioned to assume that an item in low supply must be desirable and/or valuable. This is the basis of the argument that "diminishing stock" posts can and do cause buyouts.

TCGPlayer and Scarcity

This is a good time to talk about TCGPlayer, probably the most well-known marketplace for Magic cards here in the US. The problem with TCGPlayer is that instead of being viewed as a part of the Magic market, many players and financiers view it (wrongly) as the entirety of the market. This allows savvy financiers to create artificial scarcity simply by buying out TCGPlayer, which often isn't very difficult or expensive.

Arena (Foil)

For instance, as I'm writing this article I could "buyout" foil copies of Arena from TCGPlayer for under $50. I could then start posting buyout or diminishing supply posts on my Twitter account, on Reddit, and on Facebook to make sure the community knows that the card is getting scarce, thereby increasing its demand. If I wanted to be really sketchy, I could write an article about how Arena is the next big thing in Legacy because of its synergy with Baron Sengir. In the meantime, I could relist all of the Arenas that I bought for $3 at $15 and count on the power of scarcity to bring in the profits. On the other hand, if you take the time to look beyond TCGPlayer, you'll see that several other vendors have the card in stock, not to mention Ebay, Amazon, Pucatrade, and a host of other marketplaces. My point is buying 10 copies of Arena from TCGPlayer isn't buying out the market even though it is often considered as such.

Chaz's example of the two-card buyout illustrates just how silly this can be. Buying the one Alpha Black Lotus listed on TCGPlayer isn't a buyout: it's a new addition to your cube deck or your entry fee into Vintage.

Unfortunately, the Arena and Black Lotus examples are not uncommon on TCGPlayer. In fact, most of the rares from Timeshifted have less than 10 vendors on TCGPlayer. Want to buy out foil Psionic Blast? Seven vendors, 29 copies, $175. How about foil Nicol Bolas? Seven vendors, 19 copies, $200. This pattern isn't limited to Timeshifted foils; there are only 20 near mint copies of Dragon Broodmother on TCGPlayer, only five of Phyrexian Altar (which might actually be a good buy if it's not reprinted; the spread is extremely attractive for a casual card). I could continue to list cards, but that isn't the point. The point is, TCGPlayer offers people with a few dollars and a little bit of time an easy way to manipulate the market by creating a false sense of scarcity to generate demand.

True Scarcity

When it comes to scarcity, your job as a consumer is to stop and consider whether the item truly is rare (and desirable), or if you are being tricked into thinking an item is scarce. In the Magic world, Alpha and Beta cards are truly rare. This is why Black Lotus commands such a huge price tag, and even commons like Lightning Bolt are worth a pretty penny.

The same thing holds true for other older sets like Arabian Nights and Legends, specific foils (Seventh Edition being a prime example), and certain promos (like the textless Mutavault or Doran, the Siege Tower). Keeping track of supply is an important aspect of mtgfinance, and dwindling supply is often an indicator of future price movement. I'm not trying to scare you away from using supply to your advantage. Instead, I'm suggesting that it is your job to think about your purchase and dig through the potatoes to find the lotuses.

What Can You Do?

Now that we've talked about buyouts and scarcity, here are five ways you can protect yourself:

1. Think beyond TCGPlayer. While I wrote about this earlier, it is worth mentioning again: simply looking at additional markets can tell you a lot. While TCGPlayer is a great resource for the community, just because they are sold out of a card doesn't mean that everyone is sold out. Buying out TCGPlayer is an easy way for someone to create false scarcity. If we expand our horizons, buyouts will be harder to perform and less of an issue.

2. Always ask yourself "is this a potato or a lotus?" Magus of the Bazaar is a potato. While it is technically scarce because it was bought out, it isn't that rare and there isn't any real demand. Sure, there might be only two copies on TCGPlayer, but there are plenty listed on eBay and sellers can't give them away. Would you like to know how many have actually sold this month? Three singles for about $4 each (half of the TCGPlayer price) and one playset for $27 (not including fees); so a total of seven copies.

3. Don't let your cards define you, and by association, your pocket book. We like to own scarce things because they are status symbols. I have nothing against "pimping" and I like miscut foil basic lands as much as the next guy, but when it comes to buyouts, especially foil buyouts, pause and ask yourself, "Is whatever street cred I get at my LGS for having a foil Merieke Ri Berit really worth the cost, or will a regular version suit me just as well?"

4. Check your emotions. Scarcity can overwhelm the rational mind. Instead of rationally thinking, "What will I actually do with a foil Magus of the Bazaar?" we see supply drying up and all we think is "I need it, I need it now!" This is when we get ourselves in trouble and end up buying a foil Merieke Ri Berit for $200 in the heat of the moment. Being the guy who rationally bought Merieke Ri Berit at $10 is fine. Being the guy who rationally buys one for $40 because you really want one for your Tiny Leaders deck is also fine. But being the guy who bought one for $200 while in a state of arousal is not. As Kelly Reid said on Reddit nearly a year ago, "We live in a world of perfect information and imperfect, overly-emotional investors.' Do you know what happens when you invest with your heart, not your mind? YOU LOSE MONEY. If you rush out to grab the 'latest hot spec', you're just like the fools falling for penny stock tips."

5. Think for yourself. I've said this a million times and I'll probably say it a million more: don't buy a card because I (or anyone other writer) talk about it. Don't buy a card just because you happened across a "diminishing stock" post on Reddit or saw some tweets from a GP floor. Learn the patterns and the cycles. Come to understand spreads, buylist pricing, and multipliers. In short, instead of investing in the latest hot spec, invest in learning the intricacies of mtgfinance. This is one of the reasons I try to focus my articles on data — I don't want to tell you what to buy; that's not my place. My goal is to give you more information, more data, (and apparently stories about potatoes) that will help you formulate your own conclusions in a well-reasoned manner.

Conclusion

Anyway, that's all for today. What do you think? Are buyouts a problem? If so, what is your solution? Beyond TCGPlayer, where do you look to check card supply? Is buying out the last two copies of a card truly a "buyout?" As always, leave me your answers, thoughts, and opinions in the comments, or you can yell at me on Twitter @SaffronOlive.