Updated: August 27, 2025

Key Points

• While divinized, secondary market royalties are not the universal tool to lift the social welfare; From a social planner’s perspective, the SM model enhances total welfare while reducing consumer surplus.

• The primary prices drop and secondary prices increase because of the "royalty tax," which is carried by the resellers and sponsored by secondary market buyers.

• The creator shifts the demand from the second period to the first, i.e., the first period demand increases, while the second period demand decreases.

Motivating Example

When Omega and Swatch released the limited edition Moonswatch, retail fans lined up to buy the watches at launch prices. Yet, many of these timepieces quickly appeared on secondary markets, often selling for two to three times the retail price, and in some cases, even higher. At first glance, this resale boom seems like a win for the brand: hype is high, prestige soars, and everyone talks about the release. But the reality is more complex. The profits from these markups flow almost entirely to resellers, not Omega or Swatch, because the companies cannot control secondary pricing.

Economic Roots of the Problem

This scenario reflects a classic problem in economics: the Coasian time inconsistency (Coase, 1972). When sellers cannot credibly commit to limiting future supply, consumers may delay purchases, anticipating lower prices later, undermining a firm’s ability to price discriminate over time. High demand alone does not automatically translate into higher creator profits. NFTs face a similar challenge: without mechanisms like royalties, secondary market dynamics can erode the value creators hope to capture.

Using a simple economic model, I explored how royalties affect primary and secondary markets. The results reveal a subtle but powerful redistribution effect. Introducing royalties lowers primary sale prices but raises secondary prices—the “royalty tax” is ultimately carried by resellers and absorbed by secondary buyers. More importantly, royalties shift demand forward: first-period sales increase, while second-period resale demand shrinks. From a social planner’s perspective, total welfare rises, but consumer surplus falls, meaning creators capture more value at the expense of later buyers.

These dynamics help explain why NFT platforms are reluctant to enforce royalties at levels optimal for creators. By suppressing secondary market activity, royalties reduce transaction volumes, which directly impacts platform revenue. The findings also suggest limits for policymakers: mandating resale royalties, akin to droit de suite in traditional art markets, may not be socially optimal and are unlikely to gain traction in digital markets.

In short, whether it’s Moonswatch or NFTs, the lesson is clear: hype does not equal profit. Royalties can reclaim some value for creators, but they do so by reshaping behavior and market structure, not by creating a free lunch. Understanding these dynamics is essential for creators, platforms, and regulators navigating the new digital economy.

References:

Coase, R. H. (1972). Durability and Monopoly. The Journal of Law & Economics, 15(1), 143–149.

Please cite this article as: 

Petryk, M. (2025, August 27). Who Really Profits from NFT Royalties? A Case Study in Demand, Prices, and Social Welfare. MariiaPetryk.com. https://www.mariiapetryk.com/blog/post-20