Natural Economics
A lot of people dismiss World of Warcraft as a mindless waste of time hobby. For some, it certainly is. But for most, I would claim, World of Warcraft can be an incredible learning experience. Some of the lessons it teaches you include understanding of economics, time management, wealth planning, diplomacy, people skills, probability and statistics, resource management, and system planning.
I know, I know. Here he goes again. Bear with me. Today I’d like to share with you some observations about the nature of economics based on my observations of the natural economies of World of Warcraft.
First, for those of you who don’t play, a basic understanding of the game mechanics are required.
The main goal of the game is essentially to defeat raid bosses. A raid boss is a powerful creature that requires a large number of players to defeat – some require 10, some 25 (and in the past, 40). Raid bosses drop powerful weapons and armor that you can equip to make your character stronger. In reality, most players view the end goal of the game to make their characters as powerful as possible – the raid bosses are not ends themselves, but rather simply means to an end – the boss must die before its loot can be taken. Since the game continually expands upward, every few months the “best” in the game suddenly becomes rather average – new raid bosses are added into the game with even more powerful loot. This keeps the subscribers subscribed, and the cash rolling in.
So, even though having the best loot is a fleeting moment in time with a built-in expiration date, it doesn’t matter – people wish to achieve it anyway. I suppose a real life corrolary would be to say: suppose you knew for a fact that 10 years from now, $1M would be worth only $10k. Would you still try to earn $1M today and enjoy that money even knowing it would be worthless in the future? The answer most people would probably give is yes, because even though the money will be worthless one day, today it isn’t.
Of course, there’s a side economy to the game as well – items are the major goal, but there are other items as well, for example, materials to consume to increase your skill at trade professions (which can be used to create items), small companion pets that follow your character around (for looks only – they don’t aid you in any way), impressive mounts like mammoths and dragons, etc. All of these are generally financed with the game’s currency, gold coins. Gold coins are found on the bodies of most monsters, in either pure form or via some trash items that can be sold to non-player characters to generate gold. Gold can be earned without the assistance of a group, so the only limiting factor is time. So-called “gold-farming” is an industry in China, where people play the game for hours at a time earning gold to sell for real money, mostly to US players.
The mechanics of the game prevent the best items from being bought and sold on the side economy. When you defeat a powerful 25-man raid boss, the loot he drops is called “bind on pickup” - once you acquire the item, you cannot trade it to other players, which means you can’t sell it. Therefore, gold cannot be substituted for raiding. Lastly, each 25-man boss only drops between 3 and 5 items, which means 20 to 22 of the players who helped kill the boss will not get loot each time a boss dies. Most dungeons have enough bosses for there to be approximately 40-50 items per week, but not every player can use every item. Warriors cannot use wands, for example, and priests cannot wear plate armor.
Okay. That’s enough of a backdrop. Let’s get down to how economics works when left to its own devices.
The major marketplace in World of Warcraft is an auction house. Technically, this implies some kind of bidding, and while bidding does occur, the auction house offers a “buyout” option similar to eBay – if you want the item immediately, you can pay a preset price and win the auction instantly. This option is almost always used, because unlike a real auction, items on the WoW auction house last for days at a time. You can place a bid and then be outbid by someone awake at 4am when the auction is set to expire at 5am. If you are asleep and offline, you lose. Sometimes people try to emulate a real auction environment by listing their item in an open trade chat and accepting running offers, but this is rare. Most people simply set a reasonable buyout price and most people pay a reasonable buyout price, especially on consumable items like potions that are needed at the moment and cannot be delayed. (Potions assist players when killing raid bosses, so when you’re stocking up before a raid, you don’t have 24 hours to wait to win the auction). Another mechanism used to sell items instead of auctioning them is to set the minimum price to be equal or only very slightly less than the buyout price – in other words, it would be ridiculously stupid to bid higher than the buyout price, so nobody ever will, and since the minimum is the buyout price, the seller is essentially saying: this price, or nothing.
Just as in the real world, in the World of Warcraft, time is money. Prices on goods reflect the time it takes to acquire the good. Rare goods that have small chances of dropping from monsters go for particularly high prices. There is even an import/export quality to the WoW economy, since one half of the players (the Alliance) cannot trade directly or communicate with the other half (the Horde). The only way to broker goods between them is to use a neutral auction house that takes a cut of the sale price for the service, so Alliance-only items sell for a premium on the Horde auction house and vice-versa since they require what boils down to essentially a tariff on the goods and are much more difficult to arrange since Horde and Alliance cannot communicate with each other in-game, and you are not allowed to arrange transactions strictly between your own characters, because even if you create an Alliance character and a Horde character, your Alliance character will not be allowed to bid on your Horde character’s auctions and vice versa.
Now this is where it gets interesting. Because World of Warcraft is a totally deregulated market, you might ask how it is that it functions. The answer is that in some ways, it doesn’t. In the real world, so-called price-fixing is wildly illegal. But in the World of Warcraft, it is a very common mechanism used to make money. The scheme works like this.
You pick a target item – generally something that is in high demand and is bought peridoically, such as raid potions (called flasks) – and find every current auction on the house. Let’s suppose they vary in price between 30 and 50 gold each. Let’s say about 75% of the flasks are going for around 30 and only 25% are going for around 50. You buy every flask on the auction house and immediately resell them all for 40g a piece. Since you purchased the entire market, you have no competitors, so players are stuck either paying an extra 10g per flask when the market rate is usually about 30 a piece, or going without. When his raid leader demands that he bring flasks to the raid, he buys the flasks anyway or he doesn’t get invited to the raid. You make your money.
This is a very typical activity and is usually obvious (the same player is selling the entire market of a particular good). How does the market still function without this spiraling out of control?
The answer is that it does only for a few reasons that differ from the real world. First, flasks are not a matter of life and death. You will not starve to death if you cannot afford to pay an artificially inflated market price for flasks. Second, there is, in theory, an infinite supply of flasks. They can always be renewed, which means eventually the price fixing is unsustainable. If the price fixer gets too greedy and starts demanding prices higher than people are willing to pay, someone will undercut him – it’s an inevitability. A particularly vigilant price fixer will watch the auction house for hours and immediately buy any auction that undercuts him and resell at his target price, but again, this is unsustainable indefinitely, because people have to sleep, and auction house watching is boring. Also, since goods can be traded outside of the auction house, an undercutter needs only send out an ad on the trade chat channel – which most of the server listens to – and he’ll get business.
These simple observations about the nature of price fixing in an unregulated market say everything that needs to say about market regulation. Goods that sustain people and are therefore inevitable expenses must have some regulation attached or a price fixer can cause immense harm by depriving the majority of the market the ability to pay for goods they cannot live without. This exact situation was the cause of the oil price panic last summer, when the price of oil suddenly doubled in a short time – an event orchestrated by the price fixing cartel of crooks known as Opec. Since oil is not freely available to everyone who has the time and energy to drill it up themselves (as everything in World of Warcraft is), the price fixers were able to get away with it until the U.S. surely made a back alley deal with the Saudis to quit Opec so they could keep feeding us oil at $50 a barrel instead of $120.
Of course, you could argue that it wasn’t Opec but instead it was oil speculators that drove the market artificially high – one way or the other, the price was artificially ratcheted, in exactly the same manner as a price on a WoW good is when it is price fixed.
You might ask what happens when the reverse occurs. As in real life, you can imagine that in WoW, I did witness this occur. The reverse, of course, is when a price is artificially lowered – often times less than cost – also known in the real world as a subsidy. The US government has subsidized food prices in various markets for years to prevent farmers from growing so much food on their land that the supply exceeds the demand to the point that smaller farmers starve on lack of volume. In World of Warcraft, the barrier to prevent this from happening is the fact that there is a floor on all prices. Take, for example, bags. Bags allow you to carry more items in your inventory and are a one time expense for any new character in the World of Warcraft. Bags are made by gathering cloth scraps (which drop from humanoid monsters) and turning them into bolts of cloth and then sewn into bags, a skill which all tailors have. As with all items in World of Warcraft, the scraps of cloth can be sold to vendors ad infinitum – they never run out of money, and they always buy – so as a result, the materials to make the bag have an inherent value. If a bag is sold at lower than its inherent value, the maker loses money. In a farm subsidy, the government acts as a WoW vendor – they will buy a farmer’s crop at a specific minimum value, regardless of market supply.
The first WoW server on which I played had a gnome mage named Magi who felt the need to set the market lower than cost on bags. This ruined the tailoring profession, since at the time, bags were the primary money vehicle for that trade. He saw it as a charity – having large bags is a huge advantage, especially to low level players – but the rest of the community saw it as intentionally damaging the economy and ruining other players’ livelihood. This earned him huge hatred and eventually he became a total server outcast – no one would group with him, no one would talk to him, he became the #1 target in player vs. player combat – all because he intentionally tampered with the economy. I always found this very interesting. The amount of hatred piled on this guy simply for messing with people’s virtual money was extremely telling about the nature of people.
I don’t have any experience with economics. I have never taken an economics class or a business management class or a finance class, yet my simple observations of World of Warcraft has given me a deeper understanding of basic market principles than most people in the general population, and I would suggest that everyone who plays WoW understands these same principles even if they can’t elocute them as well or associate them with the real world phenomenoms happening aroudn them.
Next time, the even more interesting subject of the raiding economy - how different groups of people distribute very finite loot resources on raids that take more time than a part time job.
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