The Economics of Warcraft
by Elizabeth Harper 
Jul 17th 2006 at 2:30PM
This interesting article attempts to explain the economics of Azeroth in terms of real life economic theory. As players, I'm sure we can all poke holes in this theoretical view of our favorite game, or perhaps find the lack of game knowledge frustrating. For example... Goods rarely cost less in the neutral auction house (though sometimes lower prices will reflect lower prices on the Alliance or Horde side - but usually neutral prices are jacked up to the highest possible profit rate), due to the higher cut the Goblins take out of the transaction. Trade-skill items are of less economic importance than seems to be placed on them - very few craftable items being desirable, long-term, over bind on pickup drops found in dungeons. And it does not consider Blizzard's continued efforts to rid the game of gold farmers, which has an ongoing (though variable) impact on the available supply of gold in the economy. However, it is always interesting to see how real economic theory can apply to a virtual game world, and I would say the article is worth a read.Update: The comments below may well shed more light on the subject than the initial article - so read on!
Filed under: Economy
Reader Comments (Page 1 of 1)
Duwanis Jul 17th 2006 3:02PM
The article talks nice, but is really short of anything substantial, which is why we can poke holes in his theory - because he's not really using theory, he's just making assertions about the game and using words from an introductory economics textbook.
A real example of economic theory would be the explanation of why prices in the neutral AH are higher than in faction ones using supply and demand and convenience; because there are fewer neutral AH's and they're more out of the way, the driving reason to post something on the neutral AH is when you have a faction-specific item (e.g. a recipe that can be used by any leatherworker but can only be bought from an Alliance NPC) that you want to sell to the other side. Because supply is low for these items (They can only be bought when posted on the neutral AH), those who post the auction have a monopoly over the other faction's supply, and can thus set the price at whatever they want, provided someone of the opposing faction wants the item.
Of course that's an oversimplification and doesn't cover all the circumstances for posting auctions on the neutral AH, but it's certainly a better attempt at an explanation than "prices should be lower because more people have access to the auction house."
Powerkeeper Jul 17th 2006 4:31PM
*step onto soapbox* First, let me apologize in advance, I only meant this to be a short comment, but I can get on a roll sometimes.
After reading the article, I have to say that he does make a point or two about inflation. What he doesn't seem to understand is that not everyone buys gold. There are those who do not and who don't have the means to earn large amounts of gold. They either don't have the time to earn money from drops or don't have the fiscal knowledge to play the market (auction house and trade channels). This means that just like any economy, you have the rich and you have the poor. When inflation is high even the poor can have money to live, just not the luxuries.
As noted recently on this site, because of the most recent world event the gold-selling sites are out of gold. This can be attributed to an increase in purchases so the customers could then purchase the items they needed to participate. As a result, inflation rose even more because of the huge influx of gold into the market. Those who sold the quest items got richer and subsequently bought more items from the auction house and were willing to spend more on those items. Many times this would put the best items out of reach for the average gamer.
Now we have greatly inflated prices and a shortage of inflowing money. The natural progression of this is a recession. If you've tried to sell anything of value recently, you know what I mean. Case in point: I have an epic drop I picked up 2 weeks ago and am unable to sell for the price it went for a month ago.
Luckily for me, it was a drop and not something I purchased for resale. Had I bought it with the intention of making a profit, I would be losing money on the deal. At this point I have two options. I can try to sell it for increasingly less amounts or I can hold onto it. Selling it for less means the future price of it will be reduced. If I hold it, I am basically withholding a portion of the money I would make from the market.
So the next time your try to sell that {Uber-Leet Item of Sweetness}, don't be surprised if its not going for as much as you hoped. As much as many people don't want to hear it and blizz tries to stop it, gold farming feeds money into the engine that is the WoW economy. I don't like it anymore than anyone else, but its a fact of life. For every farmer they ban, 2 more pop up. Since they can't stop it completely, one must come to terms with reality. If you want to keep driving your sports car, you have to keep putting fuel into it and the WoW economy is no different.
*step down off soapbox*
Tom Jul 19th 2006 9:39AM
I think the previous poster assumes that recession is necessarily a bad thing. If I'm wrong about that, sorry. Recessions occur naturally in the business cycle, and are simply prices restabilizing after a period of price inflation.
In our case, gold sellers act as inflationary forces by increasing the money supply. When they run out of gold, it is not an indication that no gold is available, it's just that the production of it has leveled off to the non-inflationary levels that would ordinarily be present without gold sellers, and prices must adjust to reflect this.
If, for example, the realmwide rate of gold generation is 1 million gold per month without gold sellers, prices will remain stable at 1 Uber-Leet Item of Sweetness for 100 gold (or whatever). If gold sellers show up and inflate that supply to 2 million gold per month, the price of ULIoS will naturally rise, probably to the range of 200 gold per item. If Blizzard then kills all the gold selling account, the price will fall back to its earlier levels. That these events do not happen cleanly and clearly delineated as I've described, is an indication of why we see ULIoS prices fluctuating somewhere between the two levels.
I disagree that gold sellers help by "putting fuel" into the economy. There is already sufficient fuel just by the fact that people are playing the game. Inflationary forces are always destructive; the only difference is in the degree of destruction. Folks in Zimbabwe are now paying 100,000 Z-dollars for a loaf of bread. Surely they are not better off as a result of Robert Mugabe's inflationary policies, just as we are not better off as a result of gold farming.
Powerkeeper Jul 19th 2006 12:26PM
Just a quick reply.
I never meant to imply that recession is a bad thing. It is, as noted, a normal part of economics.
I also didn't mean to imply that gold farmers are a necessary part of the economy. The economy could and would function without them.
What I was trying to say is that in an ideal world, they wouldn't exist. However, they are a part of the economy like anything else. It is not feasible to completely remove them, so they must be factored into any discussion of economics.
Inflation can also be a good thing, for some people. In real life, the price of commodities fluctuates and WoW is no different. In game, commodities are your necessary items you need to complete a quest or dungeon; such as armor or weapons.
In a game with a varied type of player, there are those who enjoy making money or playing the economy. When they obtain items that sell well, they make a profit. In this way, inflation benefits them by increasing that profit.
Would I like to see all gold farmers removed. Of course, but as a realist I know that it will never happen so I deal with it and do the best I can to benefit where I can.
David Hill Jul 20th 2006 12:56AM
One simple solution, allow gold to be deposited at the bank and earn monthly interest off it (say 1 gold for every 10 per 2 weeks).
Powerkeeper Jul 20th 2006 1:07PM
While your suggestion sounds like it would earn people money in the short term, in the long term it would hurt the economy.
The reason banks work is because they don't just hold your money for you. If this were the case, a bank would be a highly unprofitable proposition. They would pay interest on everyone's money and not make anything off of it.
What really happens is you are loaning your money to the bank so that they can in turn loan it back out to other people. They charge a certain percentage as interest and you get a small share of that. In this way, money is kept in circulation. If it wasn't, the economy would stagnate from lack of usable assets.
Of course in our case, a bank doesn't have to be a profitable business, it is only a holding area.
However, what would happen when everyone realized that the more money they keep in the bank and don't spend, the more money they would make. This would greatly reduce the flow of money in and out of the economy as everyone hordes their gold.
So while it may seem like a winning proposition in one way, it would only serve to limit the economy even more.