Researching virtual economies to learn about real ones
by Mike Schramm 
Oct 6th 2009 at 1:00PM
Unfortunately, the article doesn't go too deeply into their results (and it only talks about their findings from Everquest), but there is one nugget of conclusion: the economists saw inflation spike in one server over 50% in just five months. They say that the population rose on the server, which apparently made some items hard to find, thus raising prices. Economists say they've seen that same thing in the real world before: in developing nations, and in war zones. We can probably see similar effects right around a patch, or even just on weekends. As more people run to the AH to buy certain items, inscriptions or enchants, the price on those is going to rise. Interesting stuff -- it would be cool to hear what other similarities these guys have found between the virtual world and the real.
Filed under: Patches, Items, Analysis / Opinion, Odds and ends, Blizzard, Making money
Reader Comments (Page 1 of 3)
imsobuzzed Oct 6th 2009 1:07PM
I find on week ends that prices depress as the number of characters increases. This is duet to a larger number of postings on the AH and the weekender crowd scrambling to undercut each other to cash out as quick as possible. Best day I find to list items at the highest profit is Tuesday. Raid resets mean raiders needing flasks to raid as well as new gems and enchants for upgrade gear.
timmy! Oct 6th 2009 1:16PM
Agreed...I've quit posting stuff on the AH on Sunday's as most of my stuff tends to be undercut.
Cautha Oct 6th 2009 1:22PM
Definitely. I primarily sell herbs right now, and on the weekend herb stack prices go waaay down. On a Tuesday I can get maybe 30, 35g per Fadeleaf stack on my server, but on the weekends it goes down to 20g or even 15g per stack.
Rot Oct 6th 2009 1:11PM
The problem is money is "printed" (inflationary) by daily quests and selling vendors items and "destroyed" (deflationary) by repairs and AH fees. This must make the modeling and conclusions hell.
Griezz Oct 6th 2009 1:39PM
I'd say that the point here is that the "inflation" of quest rewards and the "deflation" of repairs & AH fees would likely cancel each other out, no?
Clockwork Oct 6th 2009 1:11PM
Well, I'm sure there are some aspects of virtual economies like WoW's that reflect the economy of the real-world, but there are many aspects that are complete departures or bastardizations thereof.
For instance, who in their right mind in the real world would create a product, the materials of which cost them, let's say, $5,000 total, then sell said product for $50? No one with half a brain, that's who. But in WoW, people are more than happy to use 400G in materials, then sell the finished product for a tenth of that.
And undercutting. Yes, I understand that undercutting your competition is an important part of business, but when you undercut someone, you don't undercut them by massive amounts, thereby driving down the value of your product. You undercut them by just enough that you can say, "Hey, look, we're cheaper!" But again, WoW players have no grasp on this. They go on the AH, see an item they want to sell up for 100G, and instead of putting it up for, say, 99G 99S or something, they go ahead and drop the price down to 90G. That's ten gold away from the value of your product! Why would you do that!?
These facts lead me to believe that the vast majority of WoW players have absolutely no grasp on an economy.
CTD Oct 6th 2009 1:18PM
The thing about the WoW economy is that a lot of people are at it that simply have no idea what they're doing. You don't get that in the real world, because those people would be bankrupt in a hurry.
In that sense, about the only thing to take away from the WoW economy is that bad stuff happens when you give people with no economic thought unlimited resources.
Rot Oct 6th 2009 1:21PM
You don't make decisions based on sunk costs though right? Let's take the housing market. Lets say a developer is going along making houses for $200K and selling em for $350K and all of a sudden the bubble bursts. The market prices tumble to $150K, does he not sell his inventory now? The $150K is better than nothing. Granted he might not make any more houses, but what is made needs to be sold. The market dictates the price not your costs.
Granted in WoW selling items for less than they cost to make is the price of leveling a skill. You don't see level 450 enchants selling for less than their materials right? Think of it as paying for your education to make more gold or get benefits like ring enchants later.
Tirrimas Oct 6th 2009 1:22PM
I tend to agree with you, with one caveat:
If the end product was actually useful for something besides DE fodder, the economy would function like a real one more.
Also - the devs of Auctioneer needs to rest the default 10% undercut to something like 1% in their addon. You can always tell when someone just blindly clicked "Post Items" without thinking about the price.
Clockwork Oct 6th 2009 1:26PM
@Rot
I can't speak for Enchants, but on my server (Feathermoon) I frequently see two flasks of Pure Mojo/Frost Wyrm selling for less than the price of one Frost Lotus, not even taking into account the other materials required to make them. I also will occasionally see epic gems for less than the price of the eternal and the rare gem needed to make them.
It happens far more frequently than they should. And yeah, selling something for less than the cost of its materials when the demand is dwindling is one thing. But selling it for less than its value when demand is there, as with the flasks and epic gems, is absurd.
Aedilhild Oct 6th 2009 1:33PM
"That's ten gold away from the value of your product! Why would you do that!?"
Because value isn't absolute. Steeper undercutting has two practical applications. First, brisker sales, which often allow more timely purchases and reinvestment with revenue, especially if; second, the WoW equivalent of MSRP isn't justified by demand, and sellers are forced to re-list. Sometimes, an item's low supply or essentiality can be leveraged for higher prices; but only sometimes, and when neither can be, time and money are wasted.
Cyrus Oct 6th 2009 1:44PM
"These facts lead me to believe that the vast majority of WoW players have absolutely no grasp on an economy."
Maybe you're just being too simplistic.
"But in WoW, people are more than happy to use 400G in materials, then sell the finished product for a tenth of that."
If the main reason you made the item was to get the skill points in the profession you made it with, then who cares how much you get on resale? And like someone said, sunk costs - the market rate may be less than the cost of materials, but if you aren't willing to sell at the market rate then you won't sell.
"They go on the AH, see an item they want to sell up for 100G, and instead of putting it up for, say, 99G 99S or something, they go ahead and drop the price down to 90G. That's ten gold away from the value of your product! Why would you do that!?"
Well, two days ago (Sunday morning), I turned in seven Darkmoon decks for the rep and then brought the cards to the AH. There would probably be other people doing the same thing as me soon, so if I priced the cards just under the next highest price they'd put their cards up just under my price. So I put my cards on the AH for a bit lower than that in hopes that they would sell a little more quickly, and/or in hopes that the next guy would undercut the guy before me but not me.
Redielin Oct 6th 2009 1:55PM
when I go to the AH, I'm not trying to make a profit by selling one particular item. Instead, I'm more like the Wal-Mart of wow - my goods are priced to move!
Yes, maybe it's more *profitable* in terms of a single sale to undercut by one copper, however, that must be weighed against the chance that your stuff will in turn be undercut and you'll just lose your deposit.
I put a lot of stuff on the AH, and put it up for a deal. If I have to go too low, I will wait. All I really need gold for anymore is mounts for my alts, profession training, uncut gems and enchanting mats, and repair bills. That can be mostly taken care of through dailies, so I don't try to rock the AH. Remember, price to move inventory!
By the way, I've made an easy 1000g in one day doing this, just selling stuff I happen upon while wow-ing ( frozen orbs, eternals, herbs, stuff from training professions, leveling/questing)
ixidane Oct 6th 2009 2:16PM
The first part of your comment I agree with. Players posting items below the mat costs either don't understand what they are doing, or they found a dirt cheap supplier who CODs them mats for far below AH prices (meaning that the supplier is the idiot, not the seller).
The second part, I don't agree with:
"And undercutting. Yes, I understand that undercutting your competition is an important part of business, but when you undercut someone, you don't undercut them by massive amounts, thereby driving down the value of your product. You undercut them by just enough that you can say, "Hey, look, we're cheaper!" But again, WoW players have no grasp on this. They go on the AH, see an item they want to sell up for 100G, and instead of putting it up for, say, 99G 99S or something, they go ahead and drop the price down to 90G. That's ten gold away from the value of your product! Why would you do that!?"
There are several reasons why you would deep undercut.
1. Items have no value. Value is defined by what people will pay for them. If there are 100 people who will buy item A at 100g, I'm willing to bet more of them would be willing to buy it at 90g. Those items sell faster, I make my money faster, and if there are enough people who would buy them at 90g (say 120 people as opposed to 100), I make more money than I would by selling them at 100g.
2. I need cash now for something and can't wait for that item to sell. I put up Cardinal Rubies on my server for 190g. That's the price I find that they sell every single time, regardless of what the competition does. It usually takes a day to sell though. If I need 100g now so I can get that Surge Needle Ring I want, which has mysteriously been absent from AH the last many months and may never be up there again, I'll put it up there for 140g because I know someone will snap it up real quick.
3. I'm starting a business on a new server and there are already several competitors on the market in my chosen field. If I have the cash, I can deep undercut those guys until they get tired of not being able to make any money and they leave the market for something the perceive as more profitable. I can then raise my prices to acceptable levels and make a very nice profit (until someone else decides to do the same that is, at which point I start over).
There are probably some other reasons I can't think of right now, but just because someone isn't undercutting by 1s doesn't mean they are idiots. If anything, I take it as a sign of intelligence. You could say that it destroys the value of the item, but what you really mean is it destroys YOUR profit margins. I'm in it to make money, and don't care about what anyone else's profit margins are. If I'm making money, and I'm happy with my profit margins, I will price things at whatever I like.
That's how capitalism works. Time is money, friend. Take what you can, give nothing back.
PodPeople Oct 6th 2009 3:11PM
CTD,
people in virtual economies don't know what they're doing, but the people in the real world do? to make a comment like that you must have been living under a rock for the last 3 years. the so called economic experts on Wall St. have been shown to be either inept or really nothing more than ponzi scammers.
people in the game using the AH are usually just selling stuff to get it out of their inventory at a price higher than what they can vendor it for, with the only exception being trade skill mats. Ixidane has it right, items in game have no value other than what people are willing to pay for them. it is completely independent of what it cost to make or gather said items.
i love to deep undercut those people who undercut the first guy by 1c. if you are undercutting by 1c, or even 1s, you're not really undercutting.
SerenityNow Oct 6th 2009 4:12PM
@CTD - with all due respect, I couldn't disagree more.
In real life many people don't know what they're doing financially, and spend/invest based on naivete, impulse and/or the desire to "keep up with the Joneses". Even people who "control" the market (or thought they did) have been caught with their fiscal pants down and lost a lot of net worth in the past few years.
There are far too many examples of this in the current economic slump (including a depressingly large number of bankruptcies). Sometimes someone's woes are their fault; sometimes they are purely the result of other people's greed or callousness; and sometimes they are due to both.
But the end result is that markets are based on supply and demand, and there's always one or more tangible metrics involved (usually time and ingenuity). And many people often make mistakes with their money (sometimes catastrophic ones), while others can on occasion game the system for big rewards. In these respects I think the WoW economy is a good analogy for many (but not all) aspects of the real economy.
Markainion Oct 6th 2009 4:23PM
What make me laugh is that so many are comparing this to real economics, as if we are making a product to live off. Most WOW players base producers of goods, would best described as part time producers, meaning there main income isn't from selling thing in the Auction House, but there real job is doing quest for money. Most also farm most of their mats, so there is very little real term material cost, which mean they can sell items at a low cost to make a profit.
Also we all know most players are making their product solely to raise their trade skill. Which like in real life has an investment cost , many players early in each expansion spend tons of money beyond what they can sell their goods for to get to the higher skill level goods quicker than the rest of the players, so they can make larger profits on those high end items later on. This is called opportunity cost in economics, which hold very true in the WOW universe as well. The first players to reach make skill level usually make the most money of their products until others finally catch up.
But for me I am usually fairly independent of the Auction House and the WOW economy, as a whole. Most of the Items I make that I don't need, gets disenchanted by my enchanter, to raise that skill level. Most of the gems and enchants I need come from an alt, so there is no need to buy them. There is somewhat of a tradeoff in doing it yourself, but like in real life being self reliant has it tradeoffs as well.
Himarl Oct 6th 2009 1:16PM
Yeah I find that best time to post items is on Tuesday as well. The casual gamer has posted and sold what they will on the weekend and the Tuesday raiders come on and snack up the items that are needed for raid prep.
Oddly enough.....if you pay attention gas prices sort of move along the same lines. Tuesday markups Friday drops. More people moving about more demand, more profit to be made on weekends. By tuesday everyone is working and do not want to be bothered with stopping to refuel through the week.
timmy! Oct 6th 2009 1:19PM
I've actually found the opposite, people tend to travel more on the weekends so prices will be jacked up on Friday's and come back down at the start of a week. Then again this may just be during the summer months with memorial, labor day and possibly a 4th of July weekend.
nostrovia123 Oct 6th 2009 1:21PM
THe fact is...if i can make an item for 45g and the going price is 100g, i stand to make 55g from the sale. If it sells at all. if it doesnt sell then i am out my 45g, which would be why someone would drop the item price to just above what it cost to make. A small profit is better than no profit at all