The Hype Economy

It’s been a while since I had made a post purely based on economics. But I’m back, and this time I’m meddling into business.

In this post, I want to talk about StockX, a business that primarily serves as a secondary market for various sneakers and apparel that is now valued at almost $3 billion dollars. 

StockX’s business model is simple — It is a secondary marketplace where users can easily buy or sell various, mostly luxury, sneakers and apparel. StockX has also expanded to technology, jewelry, and even the crypto sphere. However, for the sake of simplicity, I will focus on the sneaker and apparel markets —both of which already make up most of the transactions on the website anyways.

There are many questions surrounding this topic, especially with those who are unfamiliar with the resell market. So I am going to quickly answer some common questions and list some essential points about StockX and the secondary retail market in general.

“Why is there a secondary market? Couldn’t consumers just buy directly from the retail companies?”

StockX’s most popular items are those that sell out and/or are discontinued by the original producers of the product. This means that those who want a specific product that is no longer available from the original business must resort to the secondary market. In this unique market, informally known as the “resell market,” prices are often inflated depending on both the supply and demand of an item.

To help illustrate this concept, let’s take a hypothetical Louis Vuitton handbag from 2004 that has never been remade. Let’s also assume that the price that the handbag originally sold for, also known as the “retail price,” is $950. Thanks to rising scarcity and demand over time, that same handbag today has a secondary or “resell” value of $4000.

But the most commonly sought-out shoes or clothes are not old luxury collectibles, but rather relatively new releases that sell out quickly. Take this Nike/Travis Scott collaboration, which is a rework of the Air Jordan 1 shoe.

The shoe sold for $175 retail price but instantly sold out upon release. The resell price of the shoe on StockX was around $850 on the very day of the general release.

“If the secondary market is this profitable, can’t I just buy these products and sell them myself?”

Yes, but it is far more complicated than that. First of all, it is incredibly difficult to get your hands on a new release. Nike uses a drawing system that gives participants a slim chance of obtaining the opportunity to buy new exclusive shoes. I personally have been participating in this drawing system for big releases over several years and have never won. It is also hard to buy more than one of each item, as it is strictly prohibited and making multiple accounts is difficult. As for ordinary website releases, products sell out within seconds and sites often lag under the high server load caused by everyone trying to buy the same thing at once.

There are programmed technologies known as “bots” that can create multiple raffle entries undetected or purchase items from websites quicker than you can even add the item to your cart. However, these programs are extremely expensive and the amount of allowed users is limited (there are even secondary markets for the bots themselves). Not to mention that there is always a risk of the developers abandoning the program while still taking all of your money.

“What are the most popular brands?”

By far the most popular brand on StockX is Supreme, a streetwear brand based in New York City that was recently purchased by VF Corporation, a parent company that owns other large apparel brands such as Vans and The North Face. Supreme’s business model is built upon scarcity. During two approximately 16-week seasons each year, new clothes are released every Thursday and are never rereleased ever again.

Some other brands that are also popular are Nike and Ye West’s “Yeezy” Adidas branch. There are also popular luxury brands such as Louis Vuitton, Gucci, and Off-White, although they constitute less of the overall traffic on StockX.

“What is a hypebeast?”

A hypebeast is a person that is actively engaged with the clothing subculture of brands or products that have limited supply but a lot of “hype” or demand, which naturally creates a high resell value. 

Some final key bullet points before we move forward:

• StockX, unlike many other secondary markets, exclusively handles new or “deadstock” items.
• Every product sold on StockX is first delivered to them to undergo an authentication process.
• Those who attempt to sell inauthentic or used products are charged 15% of the sale price. Meaning if you try to sell a fake and/or used jacket for $2000, you’ll get billed $300.

So what’s in it for StockX? Sellers pay around 10-12% of their sales in transaction fees (exact rate depends on how much you have sold on the website) and buyers usually pay $14.95 shipping on top of a “processing fee” that usually comes around 3-4% of the product price.

There is not much information on StockX since it is still a private company, but we can certainly imagine the profitability of such a model. The operating costs are largely limited to just the salaries of authenticators, marketing managers, etc.

But StockX was not always a household name. Back in 2016, it was a start-up in Detriot with a small team of authenticators with capital likely originating from Co-Founder Dan Gilbert, the owner of the NBA’s Cleveland Cavaliers. Its rapid emergence from start-up to one of the leaders of the secondary market scene was done through a massive marketing campaign with popular hypebeasts, sneakerheads, and celebrities such as Eminem. They also offered generous discounts for new users and competitive seller fees.

Now, as a hypebeast and economics nerd, there is an overlap of interests here. StockX, through the liquid market it has created, has been able to make “hype” apparel more accessible to ordinary consumers. Nike’s $190 exclusive sneaker is expensive but still within the realm of possibility for many people — compare that to the $900 resell price and you can see the problem. Many shoes still sell for absurd markups even with StockX, but my guess is that overall resell prices have dropped significantly, which means many shoes that may have not been available to most people before are now.

Not that long ago, the secondary market for exclusive sneakers and clothing was dominated by individual resellers who could leverage their reputation and the thin market to sell products for much higher than they normally would under a more liquid market.

This does not mean the old way of doing things is over. If you still want to purchase from reputable sellers, there are services such as Grailed, where, at the sacrifice of market liquidity, you can directly buy from certain sellers.

I don’t want to act like StockX is the Karl Marx of streetwear, but their existence has created a more reliable market for both buyers and sellers to refer to. Resell prices are still crazy thanks to companies like Nike who purposely decide to produce a limited stock of certain shoes in order to maintain this facade of scarcity that we all love and hate.

And StockX is certainly not a company without its flaws. To start, StockX’s authentication service is the lifeline of their legitimacy, yet the company limits the transparency of its authentication process. Naturally, this puts users on edge, but StockX claims this secrecy is necessary to protect the effectiveness of their authentication (i.e. they don’t want replica manufacturers knowing what they’re looking for). They also encourage customers to legit check StockX products themselves and guarantee them their money back if they can prove that it is inauthentic.

But that is where StockX has fallen short. While nobody should expect StockX to catch every single fake that runs through their system (which according to the company itself is already very rare), when someone does notice a slip-up, it should be handled with utmost speed and sincerity.

But StockX’s policies for these situations are vague and often poorly handled. There are multiple videos on Youtube of prominent sneakerheads complaining about being sent a clear pair of fakes and not being issued a refund. Most times, this forces them to go to their banks and ask for a chargeback, which effectively bans them from using StockX ever again.

There are also instances of sellers having new and authentic items shipped back to them with the 15% charge. The company also suffered a major data breach back in 2019. And by major, I mean “I had to change all my passwords because people from Russia were logging into my other accounts” major. Again, there needs to be assuring responses and better systems in place to prevent these types of situations.

Despite these issues, StockX is not a fraudulent company. You are far less likely to find a video or post about the thousands of positive experiences people have had with StockX. But when reliability and authenticity are at the heart of your business model, you must protect that reputation. There was once a time when people would literally wear the StockX tag (proof of authentication) on their shoes when walking around. I now feel like that reputation has at least partially dissolved (and also probably because it looked painfully tacky).

The best way StockX can improve its service is by investing more into customer service and establishing a phone line for concerned customers. When you’re talking about hundreds or even thousands of dollars, nobody wants to wait days between emails or even minutes between live chats. 

But back to the economic aspect. I believe there is so much useful data that can be gathered from StockX and other companies like Grailed to examine how certain markets behave — much like how Uber’s pricing algorithm became the basis of economic research on supply and demand, helping economists construct an accurate demand curve.

I believe data from StockX and other resell markets can partially give us important information on how scarce markets function under liquid conditions. That information can then be applied to other important markets that operate under similar conditions, especially those in developing nations.

When are transaction costs too high? How does anticipated scarcity affect the actual value of a product? How much of a product should we produce to prevent an expensive secondary market from even emerging? These are all questions that could possibly be answered with access to StockX’s metadata.

But until I’m partnering with a Professor or holding my own Econ Ph.D., I’ll just have to wait for my chance to answer those questions. In the meantime, I’ll continue to happily rock my Supreme tees and Jordans.

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