I hear this all the time: "Hurrr! Undercutters are ruining this market! Durrr!". Today, we're going to talk about this. Undercutting doesn't ruin markets, high supply does. Also, if it's still profitable, the market's not ruined, it's just being taken away from you. Cut your margins and undercut back. Or buy them out if you still think they're wrong and you're right.

But markets should be protected from undercutters!

Balderdash. Markets are a place where people can sell their goods for any price they want. You're describing collusion between sellers to reduce "lost profits," where every time someone wants to undercut with a new auction, they do so by the smallest possible amount.

More often than not, all your competitors will have the same cost that you do, and as soon as they see you commit to an auction, they'll undercut you right back. If everyone is knocking a copper off the next highest auction, they only way to undercut successfully is to try camp the AH and make sure you're always the competitor who has visited most recently. Needless to say, this is a colossal waste of your time, and you would probably make more money per hour doing argent tourney dailies.

The only way to effectively sell your product in a market with a lot of competitors is to undercut by more than just a trivial amount. You need to make it just cheap enough that your competition is less likely to undercut you, but expensive enough that you're still making money.

Undercutting ain't easy

Bear in mind: posting an auction that has a deposit is a commitment. If it returns unsold, you lose a bit of money. If enough auctions come back, you can conceivably lose a lot of money. Be aware of the deposit costs for your items. It's based on the vendor price and auction length. If you're competing with people in a market where each item posted is a risk of several gold, you'll have to be much more careful about the amount you list at the same time. If, however, you're working on something like enchanting mats or scrolls that have no deposit (or glyphs that have virtually no deposit), it costs virtually nothing for people to cancel all their auctions and relist everything below your price.

How about a price fixing cartel?

You may think that the simplest and most profitable answer is to come to a gentleman's agreement about how to undercut one another. Price fixing requires people to make sacrifices of personal profits to further the group's profits, and get a thinner slice of a thicker pie.

Unfortunately, an individual will do much better when they break these rules. You see, the most profitable course of action when approached by a group of players trying to fix prices is to:

1. go along with it and agree to play by their rules
2. follow the rules on the characters they know about
3. create an alt with which to completely ignore said rules, stealing the largest slice of a larger pie
4. replying to their indignant tells and letters with chuck norris jokes

Long story short, in a situation where you can't legally enforce promises and anonymity is a short run into town away, you can't collude against the natural balance of supply and demand.

Volume matters

Another common misconception is that people will buy the things they need, no matter how high the price is. There is no such thing as inelastic demand. As prices go down, the number of items bought always goes up. This is true for every type of market out there, and figuring out whether selling more items at a lower cost is more profit than selling less items at a higher cost is an important part of knowing your business.

The universal answer to undercutters

If you're being undercut and you don't want to undercut back, don't waste time politely asking your competition to stop undercutting by so much, buy them out! The reality is that many people do have a bad understanding of supply and demand, and will undercut no matter what. If you know for a fact that the demand for your goods outstrips the supply, instead of canceling and relisting your goods or waiting for the competition's auctions to be bought, buy them yourself and relist them. Make sure to send them a thank you note. Sometimes that will get them so riled up that they post a whole bunch of stock under your cost, saving you the trouble of crafting them yourself.

(Image courtesy of szlea on Flickr)

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Being an auctioneer is like being able to print money. Or gold, as it were. Wait, that doesn't make sense... you can print on gold, but you can't print gold. That would be closer to transmutation? I can transmute titanium, but that's only worth it if the price of saronite is low enough to justify the time spent making it. I need some sort of analogy here. Whatever, I'll figure it out later. Making gold? Every week, Gold Capped will teach you the tricks of the trade. From setting up your auction addons and user interface, to cross faction arbitrage, to learning how to use your tradeskills.

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Tags: auction-house, auctionhouse, cartel, chuck-norris, collusion, pricing, sales, undercutting, volume, whining

Filed under: Analysis / Opinion, Economy