No, Nvidia and Microsoft Should Not Auction GPUs and Consoles

Scalpers buying up graphics cards and gaming consoles only to resell them at hugely inflated prices is a problem. And iD Software co-founder John Carmack has an idea as to how to stop it, as he laid out on Twitter last night. What if manufacturers simply auctioned their own stock directly to consumers?

“We really would be better off with a transparent auction system directly from the manufacturers and a more efficient market,” he wrote.

I’m not sure there are words sufficient enough to express how terrible of an idea this is. Not only does it fly in the face of business ethics and gets into some murky legal territory at the federal level, but it also messes with the usual supply chain and could potentially make it harder than it is now for people to get their hands on an RTX 3080 or a PS5.

In a previous life, I worked for a small middle-man company in the semiconductor industry for several years, so let me break down the production process. As an example, let’s use things called toroid cores, which are thick rings with magnetic properties usually made from iron (but they can contain other metallic elements). If you were to open up your PC’s power supply unit, you’d find one in there.

A raw materials company sells the iron powder to the company that makes the cores. That company then uses their equipment to press the powder into the core models, then they paint them, and then they can either sell them directly to the company that makes the PSUs or they can sell them to distributors who then sell them to the companies who make the PSUs. The companies that make the PSUs can then either sell them direct to companies like NZXT who provide PC building services, or sell them to retailers like Micro Center who provide whole PC components to consumers who want to build their own PCs.

That’s the supply chain everyone keeps talking about amidst the current chip shortage. Computers and consoles need a lot of components to make them work, all the way down to raw materials and small parts like toroid cores. If there’s a shortage at any point along the way, supply becomes scarce, prices go up, and consumers have to wait for quite a while before they can get their hands on those products at a normal price.

When scalpers come in and buy up all the GPUs and consoles, they create a false scarcity by keeping the end products out of the normal marketplace. Suggesting Nvidia, AMD, Sony, and Microsoft keep their end devices out of the normal marketplace and force users to go directly to them to buy graphics cards would not create the false scarcity in itself, but having those companies auction their regular stock to the highest bidder would—not to mention it would piss off a lot of consumers.

Cutting out distributors would also be a terrible idea for Nvidia, AMD, Sony, and Microsoft, who rely on retailers or manufacturing/distribution agreements with companies like Asus and MSI to sell their products. Not only would those companies have to take on the entire task of distribution themselves, but combined with an auction process that Carmack says “should net out better for consumers in the end” if all manufacturers took part, that also opens up all those companies to potential Sherman Act violations (legislation that prevents anticompetitive behavior and price-fixing).

When it comes to auctions and bidding specifically, the Sherman Act prohibits anything that could be seen as bidding or pricing conduct at odds with a competitive market. Signs of this include price increases that aren’t in-line with cost increases at any point of the manufacturing process I described above, and bid prices that drop when a new or infrequent bidder submits a bid.

Cutting out distributors entirely and moving to this manufacturer-direct auction process could be interpreted as increasing prices that don’t match with natural price increased in the supply chain—not to mention it would probably adversely affect businesses like Micro Center which sell whole PC component parts to consumers.

Carmack’s thread naturally drew some comments. Some pointed out that scalpers could still decide to try to win a GPU or console at auction. If the companies somehow recognized that bidder was a scalper and adjusted the bid price to be more reasonable, that could put them in a situation where they are investigated by the DOJ for collusion.

The process that Carmack suggests would cause more problems than it would solve. The issue of scalping cannot and will not be solved at the manufacturer level. It needs to be solved with federal legislation. But until that legislation exists, the only way we can stop scalpers is to not buy from scalpers—even if you have the money to spend on a $1,000 RTX 3070. Just be patient and wait for more stock to come to market. Scalpers will only keep scalping as long as they think there is a demand. If manufacturers auction off their own stock, it just keeps the products out of regular consumers’ hands, because only the wealthy can afford them. That’s no different than what scalpers are doing.