Apple Has Online Lotteries To Prevent Chinese Riots, Does That Make Them Money Too?

Hong Kong

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Apple products have a tendency to generate buzz with fanboys eager to line and wait and wait to get whatever new product on its launch date.This routinely happens in the US and other countries. But not in China — as least not for the iPad mini (Scalpers Lay Siege to iPad Mini in BeijingWall Street Journal, Dec 7).

“The release of Apple Inc.’s iPad Mini on Friday at its flagship store in Beijing was missing the massive and unruly crowds reminiscent of some the company’s previous product launches in China, but scalpers were still out in force despite rules making it tougher for them to buy most of the stock.

Apple is requiring Chinese customers to participate in an online lottery one day in advance to buy the wifi-version of the iPad Mini at its seven retail stores in China. Those selected, however, are limited to two iPad Minis each and must bring photo identification.

The Cupertino, Calif. company instituted the iReserve system in China after a near-riot occurred during the release of the iPhone 4S in January, leading police to seal off part of the flagship store in Beijing’s high-end Sanlitun Village mall.

The state-run Xinhua news agency later blamed the chaos on a clashes between rival groups of scalpers vying to buy up as much of the stores limited supplies of the device as possible.”

So is a lottery better than a queue to ration limited supply?

At some level, one can think of three mechanisms for doling out scarce supply. One is price. Apple could raise the price  on the day of launch (or just charge admission to the store). The premium might start at $100 the first day then fall to $75 and so on.

The premium would stay positive as long as supply is tight. This would be efficient in the sense that customer who value the item the most would presumably be the one’s that get them (assuming they have a budget sufficient to buy the item).

It would also address the scalping issue in that Apple would seriously cut into re-sellers’ profits by taking an extra chunk for itself. However, one could reasonably expect some blow back from consumers. No one really objects to Apple being profitable but being seen as taking advantage of the situation could tarnish the brand. There are also questions of positioning in the product line. Apple sells the iPad Mini as well as the regular version. Peak-load pricing could distort the pricing across all of their offerings.

Queues would be another way of allocating supply. Like pricing, this allows for a potentially efficient allocation since those who really want a new gadget have more incentive to line up. The problem here is that consumers must consider both their value and their waiting cost. The person with the highest value for the device may find waiting prohibitively expensive.

Further, waiting is socially inefficient. Gadget fiends could be at, say, work creating value as opposed to sitting on the sidewalk. Of course, one could hire a surrogate to wait for you but that just highlights that waiting is inefficient. Further, waiting doesn’t guarantee getting the device. If you are 51st in line when the store has 50 gizmos, it sucks to be you.

So queues are just costly lotteries. Running an honest-to-God  lottery is a lower cost option for customers and eliminates inefficient queuing. For example, the Cubs use a lottery to keep people from camping out for tickets. (Turns out that fielding a crappy team is another way of limiting who will wait for tickets.)

Similarly,  there has been some suggestions to force US retailers to use a lottery for Black Friday deals in order control crowds. What a lottery gives up is efficiency in allocation. There is no guarantee that someone who really, really wants the item is going to win one.

It also subject to gaming in a way. Consider Apple’s battle with scalpers. If Apple would prefer to keep scalpers from grabbing a large chunk of its capacity, it can impose a maximum purchase amount with either a queue or a lottery.

A queue, however, requires recruiting minions to pack the queue and wait for hours. A lottery means having minions flood the lottery with entries. Unless one has to fork over something in limited supply (such as a credit card number), each minion could have multiple entries. The cost of actually sending people to the store is then reduced.

Will Apple ever bring its lottery to the US? Probably not. Apple is probably wise to use a queue in places where waiting is orderly and unlikely to result in a riot. As long as the press obliges with free coverage of people standing in line, it is hard to argue for a lottery.

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