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Tuesday, May 25, 2010

File this under "Duh"

The recession has re-introduced markets of all kinds for individuals who are strapped for cash. When a business buys air time on local radio and television to inform individuals to drop their Rolex in the mail and to receive a quote/payment in return my cynicism kicks in.

As an economist I quickly look to how reputation and other factors will regulate the market. My take on the mail drop was that there were very few elements that would encourage those buying the jewelry through the mail to be ethical. Indeed, this was the very topic of my first lecture in Managerial Economics this past semester - how do ethics and business interact?

My take is that the most ethical jewelry buyer would be a jeweler with a storefront and a relatively long history of being in one place. This imposes costs on the jeweler when she doesn't behave ethically. The guys who set up shop in the local Holiday Inn for the weekend have less to lose by cheating individuals and therefore I would expect more complaints about these individuals than the local jewelry shop. Finally, the mail-drop companies have the least to lose for behaving unethically and therefore I would predict the most complaints to be about these companies.

However, why would individuals go to the mail-drop company over the local jeweler? Perhaps there are reputation costs for the individual jewelry seller. If you take your jewelry to the local storefront maybe your neighbors will see you, or the jeweler attends your church and by selling your jewelry to her you are revealing something about your finances that you might not want others to know. The Holiday Inn sale offers a bit more anonymity because the buyers are transients and won't spill the beans over coffee at church on Sunday but individuals still run the risk of being seen selling their jewelry [at our local mall there are kiosks offering to buy gold. I have only seen one person trying to sell to this kiosk and she did not look very comfortable doing so - whether that was because it was so public or because of other reasons I don't know, but it makes me wonder]. The mail-drop jewelry sale offers the most anonymity for the individual seller and therefore might be more attractive, on the margin.

That said, I am confident that most people know that taking their grandfather's pocket watch and dropping it in the mail entails considerable risk that the watch won't come back if it is requested. Thus, without any data, I would predict that the prices "offered" on the advertisements for the mail-drop companies are higher than the local jeweler in order to entice individuals to overcome their risk aversion in the mail drop.

So, we have mail-drop companies that have little reputation at stake when buying jewelry and individuals who want to avoid reputation costs in selling their jewelry in this fashion. Not surprisingly there are a lot of complaints to the government and the government has responded with proposed legislation titled "Guarantee of a Legitimate Deal Act." The act looks to guarantee certain return policies on the part of gold buyers. Specifically:
(a) Unlawful Conduct- It shall be unlawful for any online purchaser of precious metals to--

(1) refine through melting or otherwise permanently destroy an item of jewelry or precious metal which the online purchaser of precious metals has made an offer to purchase before receiving an affirmative acceptance of such offer from the consumer to whom such offer was made;

(2) fail to promptly return to the consumer any jewelry or other precious metal if the consumer declines the offer to purchase made by the online purchaser of precious metals;

(3) fail to insure any shipment of such jewelry or precious metals in an amount equal to--

(A) 60 percent of the melt-value of the jewelry or precious metals;

(B) the amount the consumer insured the shipment of the jewelry or precious metals to the online purchaser of precious metals, if the consumer provides the online purchaser of precious metals with proof of such insurance.

I get the point of the legislation and I actually sympathize with the individuals who have been burned by bad actors.

However, I wonder if the legislation might make things worse because it might reduce the vigilance of the individual who anticipates that the legislation has pushed out all the bad actors in the market.

Also, the title of the bill is bad. It suggests that there is a government role in determining what a "legitimate" deal actually entails. This is not the proper role of government. What if you find a Porsche 911 for sale at $15 and purchase it. Does the seller get to renege on the deal because they didn't know what they had? What if an individual offers what they think to be an ugly painting for sale at $2 in a garage sale and that painting turns out to be a Picaso or some other masterpiece? Who gets to complain that the deal wasn't legitimate?

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The kind of gold you can sell ranges from inexpensive gold trinkets to dental gold to solid gold coins and fine jewelry.

Sell gold jewelry
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