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Education is more than the accumulation of knowledge. It’s the growth we experience when digging deep into the topics, systems, and ways of thinking that give flavor to life. Enlighten Me is dedicated to bringing listeners into the world of the unknown and providing meaningful insights into issues that affect us all. In each episode, we bring in researchers and experts from a wide range of fields to discuss a topic and how it relates to their industry.
Part of the TXST Podcast Network: https://www.txst.edu/podcast-network.html
- Hello, my name is Jesse Backstrom. I'm an assistant professor at Texas State University here on "Enlighten Me." And today we're going to be talking about the trading card economy. As I pursued a postdoc at the University of Chicago, I got turned on to a new method that can be used to study economic questions, known as field experiments that have kind of taken wave over the last couple of decades. And to implement a field experiment, you need to identify a naturally occurring market and be able to implement controlled interventions that allow you to make causal inference. The sports card market is a market that I was very passionate about as a child. And kind of up until my high school years when it no longer became cool to collect cards, I got away with it, but then this gave me the perfect parlay back into both being a hobbyist myself and also using the market as a research laboratory. So what is a trading card? Well, a trading card is typically a piece of cardboard that can vary in size, but somewhere between the range of about 2 1/2 to 3 1/2 inches wide by tall. And on that card is going to be printed some aspect of popular culture, whether it relates to sports, football, basketball, baseball, soccer, wrestling, UFC, boxing, but it also can reflect non-sports, in other aspects of popular culture that people can relate to, right? And so it's a physical product that has traditionally been retailed, but has since become a staple of American culture. What are some of the main differences between why collectors sort into sports versus non-sports cards? Sports cards, as I described, are directly going to connect to people's favorite sports figures, teams in moments in time that may have come from childhood experiences or memories of a team and families or friends gathering to watch a game or other major sporting events. And so in a lot of ways, they're nostalgic. In other cases, you have individuals that are exclusively interested in buying cards with the expectation that they're going to appreciate in value. And what's interesting about sports is that sports cards have been printed for over a hundred years, and a lot of those players are no longer living. And so this is what creates kind of an interesting divide between what are considered vintage cards versus modern cards. The idea of collecting sports cards differs in important ways from the idea of collecting non-sports cards. And so let's take Pokemon for an example. In Pokemon, you may be interested in buying Pikachu, or Charizard, or Blastoise, and the others that I'm not remembering. And Pikachu is not going to be subject to some on-field playing performance evaluation that could be directly connected to the value of those cards. In a sense, the market for non-sports cards is going to be a lot less subject to random variability on field or off-field events that could influence the degree of speculation surrounding where card card values are going. So imagine a case where you own a card of a player who all of a sudden experiences an injury on the field and all of a sudden a playing career or the season is derailed. Well, that event is going to directly impact the value of that card. In contrast, you have non-sports cards that are going to be much more insulated from those types of events. For example, Pikachu is not going to break a leg on the football field or commit a crime off the field. The prices of Pikachu and other Pokemon cards are not going to be subject to the same level of random variability in events that can happen in the sports card market. These cards have historically been thought of as just being collectibles. It has since become a type of product that has also attracted more of an investor type of person where it is no longer just a collectible. And you get an interesting segmentation in the market where you have people that are buying and selling cards purely for recreation and leisure purposes that never have any intention of trying to make money. And you get others that have no connection to the cards whatsoever, but they're treating it as an asset that has some tangible value that can appreciate and be resold as a form of revenue or income generation. So the trading card hobby has over a century built up in its longevity. Probably the most famous anecdotes of trading card collecting started in the early 1900s when baseball cards were actually inserted into tobacco packs. And inside of those packs were trading cards that became collectible and tradable predominantly amongst youth. The story has it that there was one famous baseball player named Honus Wagner that did not like his name and image and likeness being associated with tobacco and potentially encouraging youth to use tobacco. And so he mandated that the manufacturer pull all of his cards from production and insertion into those tobacco products. What this did was created immediate scarcity as there were a number of his cards that still made it into those products and have since been floating around the world. And to date I believe there are only 62 known copies of that card from, I believe it's 1909. That card has kind of been the talk of the hobby for decades and decades and decades. This year it had been 50 years since a new card had been discovered, and there was one family that had that card in, I believe, its family history for about three generations. And it was revealed to the market and authenticated so that it was real and then graded and it went up for auction earlier this year. And it sold for somewhere in the range of four to $5 million But since that time, the market has evolved in very unique ways that have allowed the manufacturers of cards to realize that people are collectors by heart, whether they know it or not, they are. And there are different ways that you can produce products that kind of cater to those emotions and feelings and other psychological factors. There are a number of ways that the hobby has evolved, right? And so kind of pre-2020 and since the early 2000s, the market had been experiencing relatively steady and kind of seemingly explosive growth towards those later years right before the world shut down. So the world shut down and it led to a whole hoard of new entrants into the marketplace, including many of which were very inexperienced market participants that didn't have the same level of familiarity with market norms and true scarcity in product. And so you have a massive influx of new demand, and that's what basically drove prices to all-time highs kind of over the 2020 to '22 period. And we're seeing lots of segmentation in the market in the sense that pretty much anything has become collectible in today's world. And so, ultimately, the market has become a very accessible business for a lot of individuals. So digital selling has become a mainstream event in the hobby. There are kind of differences in opinion on how the idea of a "break," quote unquote, got started. Some refer to a hobby shop, card shop in New Jersey around the 2018, 2019 period, but I think it could also be traced back to a soldier that was deployed overseas in the late 2000s that decided to start recording videos of himself opening packs and then revealing what was inside the pack live on stream. Basically behind the idea of a break is that a seller that has an online count and access to a livestream video as a mechanism for creating sales decides to not take the risk of buying and opening every single one of those packs inside the box, but instead allocating the rights to the contents of what comes out of those packs ex ante, prior to the revelation happening. And so imagine a case where we have a box of cards here with 36 packs inside of it, and me as a seller would be live on video and I would have sold access to say all 30, players from all 30 major league baseball teams or all NFL football teams, and the individuals that acquire the rights to each of those teams pay a fee, or maybe they bid in an auction for them. And after the break happens, they will receive all the cards from the team or teams or cities that they acquired the rights to in the mail. Since then, there's another type of break that frequently occurs and it's called a repack. And so as you can see on the table here, I have some examples of cards that are in graded slabs. And so cards that went through the third party professional grading system and were evaluated based upon their condition and then assigned a quality grade. And so some of those cards may be a little bit illiquid in the sense that they're hard to sell at a card show or a list setting on eBay for too long, and the seller is interested in liquidating. So one of the ways that the seller can do so is play into the uncertainty realm that, in a lot of ways, the hobby is built upon. Repacks, as I mentioned, are an extension of the breaking market, right? And so imagine a case where you have an ungraded card. Right here, this is a 2000 Tom Brady rookie card, right? And me as a collector or investor in this card, I might be interested in trying to navigate ways in which its value could appreciate. And so one of the most common ways of doing so is submitting it to a third party grading company, right? And what these third party grading companies do is they evaluate the condition of the card on four dimensions, namely the corners, and so making sure that there are no corner damage, ensuring that the edges are also in their pristine condition, looking at the centering of the image on the card, and so whether it's left to right, right to left, up to down, top to bottom, or whether it has any surface imperfection such as scratches or dimples and other imperfections. And so these grading companies evaluate cards on each of those four dimensions and then sign it on a grade typically ranging from 1 to 10. If you turn an ungraded card into a card that has a perfect grade 10, it potentially can turn say a $200 card into a $2,000 card or more. There's a lot of variability depending upon the card. But now let's say you submit your cards to one of those authentication companies and grading companies, and you don't receive the grade that you want, and therefore the value isn't necessarily where you're also hoping it to be. And that potentially also influences the liquidity level of that card. And so it may become a little bit more difficult to actually sell that card because of the fact that, well, maybe a collector or the majority of collectors want cards in their pristine condition. An easy way that has been invented to get rid of those cards is to play into the uncertainty that the hobby is ultimately built on, right? And so that's where the idea of the repack was born, meaning you take a card that was submitted that may not have received the value or the grade that you wanted, which this one's a PSA 10, but let's say the liquidity of that card is not where it should be in order to quickly get rid of that card. What you can do is then reinsert that card into new packaging that anonymizes that card. Some questions have come into the ethics surrounding how repacks are manufactured, just because by design, in my opinion, they are a catalyst to getting rid of cards that may otherwise be of lower liquidity. So this is a very loaded question, right? What are the economic factors that are currently driving the state of the hobby today? And we could probably have a podcast on its own that is exclusively discussing that issue, but I think you can break it down into a number of supply side factors, demand side factors, and then also factors that are related to social media and intermediate stages of the supply chain. On the supply side, there has been some very important reorganization amongst the market of manufacturers. Fanatics is a company that has become a staple in the hobby, and they've acted very strategically over the last number of years as they have acquired the licensing, exclusive licensing rights with the major professional sports leagues and players associations in the United States, which basically gives them exclusive access to producing products that have the name and image and likeness and other associated characteristics for the players in their playing uniform in each of the professional leagues that they hold those rights for. And what that also does is makes it so that the other manufacturers in the space can no longer produce cards that may be considered to have the same characteristics or attributes of the cards that have been printed by Fanatics that show those characteristics that are desired by collectors, right? And so this has led to kind of some monopoly type accusations of Fanatics especially amongst the other card manufacturers, but also amongst collectors in the hobbies, simply because if you have a monopoly-like reorganization of the market, well, that enables the firm to extract a greater share of the benefits from transactions in the marketplace, right? And so the question is both on the producer side and also on the consumer side. In other ways, the products that these manufacturers are producing have become increasingly innovative, right? So if we date back to kind of the origins of card printing, most cards were printed in a very simplistic base version where there is one card of each player on that team, and that's it. Companies have been producing limited edition serial numbered cards that are much more scarce relative to the base version of cards that typically are much more mass printed. And so they're inserting natural scarcity into the available product mix that collectors are hot after, right? Those lower limit edition numbered cards tend to sell for a substantially larger amount of money than cards that are more abundant in nature. The, the card manufacturers have also begun inserting unique types of memorabilia into cards. And so imagine pieces of shoes or cleats or balls or bats or gloves or jerseys being cut out and inserted into certain cards. And so those are other kind of attribute level or card level attributes that have also been brought into the hobby that didn't exist several decades ago. And so the type and variation of products that are available to consumers has also increased, but there has also been some increasing competition for new firms attempting to enter into the market for professional grading and authentication services. And so I described PSA, Professional Sports Authenticators, previously, and their model dating back to their origins uses exclusively humans during the evaluation process. Well, there's a lot of speculation that humans suffer from cognitive limitations and other behavioral type biases that can limit the ability to actually evaluate a card to its true condition. And so companies have attempted to begin bringing in other types of technologies that can potentially provide a greater signal or a more true signal of that true card's condition. And so one company that I've been really interested in the last couple years is known as TAG, and they've brought in what I kind of refer to as an X-ray type technology that is able to scan cards and basically print a grid on top of those cards where they then are able to detect imperfections on the card surface, corners, edges, and centering at a much more micro level than what a human would be capable of. Well, what goes into that process is important, is that humans that are evaluating, and are they able to provide the best or truest signal of that condition of the product that is under grading, or should it be left up to machines? And I think there is kind of a complementarity that exists because of the fact that humans are limited for the reasons that I mentioned, but also at the same time machines are also not able to perform some of the tasks that the humans are. And so what I think one of the biggest objectives is, is to determine the right set of complementarities that exist between human and machine grading. And that's another part of ongoing research that we have been discussing on internally. That's all for now. Thank you for tuning into "Enlighten Me."