Prices as Signals

I was listening to Michael Munger’s podcast on price-gouging last week, and it reminded me of the price of silver in Middle Earth. “The only way you get low prices is by letting people charge high prices.”

Silver is a bottleneck for jewelers. There are two types of metal nodes at each crafting tier, and silver is the less common one in tier 2. If you want to advance a jeweler, you make a lot of silver jewelry or polish a double-lot of gems. As a tier 2 resource, it is where the level 15-20 folks hang out, not the level-capped masses. Because it is a less common resource with relatively few people collecting it, price is high. It was selling for higher prices than ancient silver, the tier 5 (top-level) jeweler metal (which was just made more common).

Now if you’re playing WoW, 10 silver pieces (vocab: 10s is “ten silver pieces,” because otherwise it will get confusing talking about silver ore and silver pieces) for a chunk of ore or an ingot isn’t all that much. Inflation is much lower in The Lord of the Rings Online™: Shadows of Angmar™. 10 gold pieces will buy literally the most expensive thing in the game, so 10s per resource is fairly high, particularly if you need several stacks to get through a crafting tier.

How do you react to this situation? Some people said it was unreasonable to charge that much. Others took to the forums and called for more silver to exist. The wisest people picked up picks.

If you’re mid-level, all the monsters in area that get silver nodes are gray to you. You can merrily run through, harvest everything, and sell it at a nice profit. The price of barrow-iron ore (the more common tier 2 resource) fell through the floor, as people cleared those nodes in hope of a better respawn.

You might think that the amount of silver ore in the game is fixed, because there are only so many resource nodes to spawn it, but how many of those are camped? In my experience, 0: the only resource I ever see people fight over is monsters. There are resource nodes out there right now waiting for you, if you think it is worth your while to go farm them.

At 2s per nugget, you would just keep farming on your level 50, but at 10s for ore, it is worth it to change zones. Each click on that resource node gets you 20-40s. You might even get some gems or other by-products along the way. Get some stacks of silver ore, post them at some silly buyout, and rake in the funds.

There are five zones that spawn silver nodes. That is a lot of silver that someone could be bringing in. While you are posting yours at 10s, someone else wants to sell his now so he can get his money. He will sell at 8s. (Why not 9s or 9.5s? Some people will sell at 9.99s, but people who want a guaranteed sale tonight often cut prices by 20-30% below the guy who has 20 auctions worth of stuff. I could match his price for a 1/21 chance of getting a big sale, or get a more or less guaranteed sale for a bit less.) And there are a lot of those 8s and 9s sellers. If half of yours fail to sell because of them, are you going to re-post the auctions at 10s, or drop the buyout a bit?

And in this way, the price you pay for silver ore quickly drops 20%, and it keeps dropping until it is not worth it to farm ore. And while you’re out there farming ore, you can farm hides for your tailor or finish a few deeds, so you will find a reason to keep bringing in the silver even as the price drops.

This is the story of why letting a few folks get away with ridiculous prices brings lower prices for everyone. Prices serve as signals, and high prices are clear signals that it might be worth doing something else for a little while. For buyers, use a substitute; for sellers, get more of that thing.

I am reminded of someone’s Star Wars Galaxies story. His server had adopted a norm that it was inappropriate to charge a big markup on crafted goods. You could cover your costs, but people would shun you and write nasty things on the forums if you wanted five or ten times your material cost.

So there were very few high-level crafters. Who wants to grind all the way to mastery when there is more money in farming rats? At least rats drop loot consistently; if no one is buying your blasters at 10% markup, you are just sitting there hoping to make some of your money back.

Then one guy, seeing a wide open market, worked his way to top-level gear. He charged as much as he could. People complained, and hated him, and grumblingly paid whatever he asked because he was the only guy who could make top-level gear in quantity. People were lining up to pay prices they complained about.

Someone else saw the money there, did some crafting, and started under-selling. He did not sell at 10% markup, but maybe at 10% less than the big seller. That was still a lot of money, and while there was some grumbling, people were happy about this new guy. Think how much they liked the next new guy, who knocked off another 10% to undercut #2? And so on, until you got a thriving market.

You can have nothing at low prices or a lot at temporarily high prices.

“Why are you charging 2 gold for this when that other guy is only charging 50 silver?” Why don’t you buy from that other guy? “He’s all sold out.” Come back when I’m sold out, and I’ll drop my price to 50 silver too. Heck, I’ll give you a discount.

: Zubon

Your mileage may vary by server. And if your server is still radically over-priced, I just told you how to profit from it. If you still think of it as price-gouging, switch to thinking that you are just asking for what your time is worth.

14 thoughts on “Prices as Signals”

  1. Market PvP can be interesting, but unfortunately many games don’t offer proper tools for it. EvE is an exception, because it offers an important additional signal for traders: Buy orders. In most MMOs you can only offer to sell stuff, not buy it. This makes evaluating the “proper” price hard, and you have to guess what the acceptable price is. Guess too low and you’ll lose a lot of potential income. Guess too high and you won’t make any sales. If there are costs for setting up sell orders, some commodity goods might just not be worth trading in. The time and money you spend in reposting your items until you find out that acceptable price could better be spent elsewhere, so people won’t do it. And thus the market dries up, even if there could be both supply and demand.

    Buy orders allow potential sellers to accurately evaluate the opportunity cost before investing any time or money acquiring certain goods. Also, the presence of both buy and sell orders allows the market as a whole to engage in haggling in a transparent manner, with no need for addons that try to predict future behavior from past performance. It also allows both buyers and sellers to choose between time and money. If you want to save money or get the best price for your goods, you haggle. If you want an item now, you can pay premium. Likewise, if you need some cash now, you can just liquidate your assets at less-than optimal rates.

  2. This is very true in an economic sense, and for a game like EVE Online, which focuses on economic gain, it works very well. The problem is, for most MMOs economics is a secondary aspect. Generally, cash is just one more grind in the way of your actual goal. While the free market ideal of people moving to where the money is is great for some systems, to me it seems that the system which you describe simply hauls people away from things they enjoy (adventuring, exploring, raiding, whatever) and forces them to wander around trivial areas looking for resource nodes. Obviously, if people enjoyed that there would be plenty of people doing it already, and silver ore prices would fall. The fact that people don’t go and farm resources despite the economic advantages suggests to me that it’s something no one really wants to do. The difference is, in EVE money is essential part of the game; after you’ve played awhile money IS power, as they say. For typical MMOs, money is secondary and after you have so much having more is essentially useless.

  3. People don’t get that one simple rule: you can’t escape the supply demand curve. Price too high? Increase the supply! (hey that rhymed). If they capped the price then even less silver ore would be available, because no one would bother running out and getting it except crafters on their alts to use for themselves. Price caps remove incentives to supply and almost always lead to shortages. You’d think we would have learned that from the 70s.

    It’s funny, you read forums and people complain about the guy charging high prices and how selfish he is. Then in another post that same person complains about the player who undercut him, since the complainer is charging “fair” prices and the under cutter is selfish! So high prices=selfish. Low prices=selfish.

  4. Of course, price caps are not going to help the situation. I think the real problem here, however, is the value of money. Things like equipment which can’t be traded and level requirements on gear mean that money just isn’t that important. Consider; if you had an unlimited budget and bought the very best gear at all times, would it really make much difference as you leveled? Would it make any difference at all once you hit the level cap?

  5. Can I drop a little bomb? Okay:

    I don’t think the laws of supply and demand work in virtual worlds as they do in the real world. Trying to translate them verbatim into virtual worlds will end up with broken (yet still a bit functional) models.

    (nothing to do with your point, Zubon. Just talking generally)

  6. Well, in many virtual worlds there is no such thing as a finite supply of something. No matter how many silver veins you exhaust, a new one will spawn. Even EvE has respawning asteroids and inexhaustible moons. If there are not enough money sinks, inflation kicks in and the total wealth in the system will keep increasing and thus the absolute prices are going to rise.

  7. Raelyf said, “The fact that people don’t go and farm resources despite the economic advantages suggests to me that it’s something no one really wants to do.”
    I wouldn’t say no one, we who enjoy it are just a very rare breed it seems. I enjoy the finding and understanding how the system works (while yes, silver is rare, there are places where silver spawns in high concentration, finding that was the fun part); the gathering is cathartic, a good way to end a play session. Of course, for me, I place higher value on thanks from friends than gold, so the resources I gathered went to the guild first and were sold second, so I would not be helping the current situation if I were still in game. I wonder if that is similarly true for the other professional gatherers out there.

  8. up until recently, the lotro market had one huge flaw (and i took pains to take advantage of it :P). In a matter of about 2 hours i could guide a kin group through Ost Elendil/Gardens in annuminas. 2 full runs would guarantee me 16 battered armour and usually 18-20 depending on how i rolled on the random drops. That is 5 master jeweller recipes… and at anywhere from 2-4g each i could easily approach 10g profit per night. I am prety sure that most of the people who bought my recipes were simply speculators looking to turn them around for even greater profit, but the fact of the matter remains that there are HUGE deposits of gold in players’ coffers just waiting to be tapped. Spending my time searching for silver nodes is fooling with chump change

  9. Shalkis, I love buy orders. City of Heroes also has those.

    Raelyf, good point: you may not want these factors in your game. But as long as scarcity exists in any way, these factors still exist. And if scarcity does not exist in any way, you are in a very unusual situation.

    Yunk, “So high prices=selfish. Low prices=selfish.” is absolutely true. You set whatever price will make you the most money. Doing otherwise is just distorting market signals with charity.

    Trin is engaging in that charity directly, not interfering with prices along the way. But that would help the situation: increasing the supply works whether you give away the ore or sell it. You fill some of the demand from your guildmates, so they do not hit the AH, so there are fewer people competing for AH silver ore. Of course, if you are giving it away, you may be encouraging new demand or fulfilling it for people who otherwise would not have been interested, but more supply is more supply.

    Merimet was also increasingly supply of a highly demanded product. Good public service! Without you, prices would have been even higher, and fewer people would have had etched beryls pieces.

  10. You know, sometimes when I overdo it with the peyote, I think how neat it’d be to have an MMO with finite resources.

    “Right, so as you can see here in slide 47, we’re going to use metals both for crafting and as in-game currency. We’re gonna kickstart the world with a billion stacks of iron, 100 million stacks of aluminum and 10 million stacks of Titanium. And that’s it. Non-renewable and…”

    “OMFG! What’s gonna happen when it’s all gathered and players still need more?!”

    “I was getting there. PvP. Slide 48…”

  11. The other part of the equation is the money sinks. Stuff appears from thin air on MMOs, and stuff disappears into thin air. If you pay an NPC one gold for something, that gold piece is simply gone. The NPC will not use it on anything. Any MMO with finite resources would have to take that into account.

  12. I recall the UO days as a tailor to camp the tailer shops so we could buy shuttles to sew with. Gating there to race other tailors was the most non-lethal resource camping experience I have ever had. I wonder if my small cottage still stands on the west coast of Occlo..

Comments are closed.