Ogs Tutorial of Economic Gaming

Opinion from Starks - Saturday, 16 May 2009 @ 7:54am

Og says 'Og do degree in Macroeconomics at Orgrimmar University!'

Over the past two months, there have been two things in common; The World Economic Crisis and my decision to reroll in World of Warcraft. As a retired capitalist, I have watched on with interest as the world has been thrown into this hotpan of economic misfortune. The Economic Crisis has purportedly stolen all the worlds money, dumped the share market into the negative and put a lot of students out of work because retails is getting shafted harder than when Debbie did Dallas. Wait, that’s a Matt joke, right? Anyway, the financial concerns of the world have been, despite public knowledge, very much on the cards since about mid 2007, when share markets began to slow due primarily to the lending practices involving the origination and distribution of mortgage debt in the good ole’ United States of Assholesmerica.

Combined with sharp hikes in oil and food, this added extra stress to the economy as people found it harder to survive and pay back the loan on their 125% mortgage i.e. They borrowed 125% of what the house was worth not only to buy the property but furnish it with new goods. As a keen observer of the market, and somebody who was proverbially ‘new to it all’, I watched with muted interest as how things began to pan out, and distinctly remember an e-mail from my brother, a trader for a large multi-national financial institution, who told me in January 2008 to ‘watch as the mighty will fall’. Since that e-mail, several large and established institutions have collapsed in on themselves, and the United States Government is fighting a losing battle to keep their car market alive.

There’s a whole lot of other things that are to cause for this, but instead of boring you further I suggest you go have a look at this Wiki Article, which is quite good and I’ve actually stolen used some info for here. In any case, it’s all very interesting to someone who looks on and has seen his superannuation halve. Of course, half of nothing is an #Error on my calculator, but then that’s not really what I was trying to get across.

What does this mean to gaming and, in particular, WoW? They’re linked only in a way where I have connected the dots. And what I’m going to discuss is the economy of WoW, and how it is by definition a marketplace that cannot ‘crash’ like the real worlds. Well, not in the same manner, anyway.

To explain all this I've conscripted the efforts of my good friend, Og the Orc, to help explain some of these crucial components of understanding the WoW economy. Say hi Og!

'Zug zug. Stop poking me!'

My analysis of the Auction House has been somewhat more detailed than your average user. I had a look at a few different servers and the prices for various products (Commodities, shall we say) and compared them. What I found was the price of Mageweave Cloth was 5g – 25g for a stack on Dreadmaul, the server I am currently levelling my Orc Hunter on.

I popped over to Spirestone, and logged in to my Night Elf Hunter and checked out the price of Mageweave there. I was surprised to see the price for a stack was 1g – 5g. This is a pretty incredible fact. I actually couldn’t believe the difference in price. I decided to look into it a little further.

There are several differences to the two servers, which I’ll noted below:

• Dreadmaul – Oceanic, newer server, lightly populated server, small number of level 80’s.

• Spirestone – U.S., older server, medium populated server, large number of level 80’s.

So what exactly does this mean?

I’ll try to use some relative examples. Dreadmaul could be essentially called ‘Australia’; smaller economy, smaller population, younger economy, less money circulating around and less commodities being pooled by the market.

Spirestone could be considered, say, Singapore; larger economy people, larger population, more money floating about, older economy and more commodities for everyone.

One should constantly remember that the relative 'level' of the market is crucial to understanding what will be in demand; The higher the population of 80's, the higher demand for matrerials and items for level 80's will be. This is crucial to understanding how to make money down the track, as you can understand realm economics well, but if you don't know what is in demand, then you can't provide a supply to make money. This is very similar to demand in the real world.

With this in mind, it can be seen that I am touching on two economic concepts call called ‘price elasticity’ and ‘supply and demand’ – concepts that are related to one another dependent on certain areas I’ll go into later.

The concept of price elasticity is that the more of a product there is, the less the consumer will be expected to pay for the product. So, if I rock up to the AH and look for (Keeping with our example) some more mageweave, and find that there are hundreds of mats floating about, I will expect to pay a much lower price for the product. To quote an economic textbook - The greater the extent to which demand falls as price rises, the greater the price elasticity of demand. However, if I find that there is very little of the product, I will expect to pay a higher price for it. So if, for some reason, there was only two mats of mageweave on the AH, I’d expect that I would need to pay a higher premium in order to actually purchase the product.

Og says "More meat = cheaper price, less meat = expensive price!'

Price elasticity links to where demand is derived; If a product is an integral part of a market then it will drive a higher premium, due in essence to whether it has limited supply or is a key component to continued existence. In terms of WoW, it is akin to putting up for auction an item that has a very low drop rate yet is greatly valued by players, or by selling mats (aka raw materials in the real world) to allow others to purchase these and transform them in to new products to sell.

When it comes to farming, if you have a large supply of a product, then you can afford to sell it at a cheaper price to encourage demand and make back your money via the volume of sales. This would be classed as predatory pricing, and could come back to bite you in the ass if you have a vested interest in the actual market. For instance, if you regularly mine silver ore, smelt it, then sell it for a fixed price on a regular bassis then nothing is more frustrating in the world to see some guy selling Silver Bars at a third of what you usually sell them in. It could be classed as 'dumping' in a domestic market.

If, however, the product is rare and hard to find, then as stated earlier you can charge a higher premium in order to correctly gauge the worth of the product. for instance, not everyone can farm Thorium or Mithril in large quantities. If you're the only regular miner of these materials, then in reality you're cornering the market and holding a temporary monopoly. I say temporary, because in reality you're simply taking advantage of a situation that could at any time cease should someone else enter the AH with the same product.

Note that price elasticity, which is how much price can shift whilst still making sales, and supply and demand, which is how much is available to the requirement of the market, relate to each other. As time goes on, price elasticity becomes more difficult to manipulate when people establish the 'true value' of the product. For instance, I would argue that due to the older conomy of Spirestone in comparison to Dreadmaul, people on that server would recognise that anyhthing over 5g for Mageweave is paying too high a price. As such the price will be fairly inelastic even if there was short supply and high demand. A real world example would be charging someone $50 for a bottle of milk; They simply wouldn't pay it knowing the true value of the milk even if it was the last bottle in the store.

When it comes to manufacturing, and this is important to note for the professions such as Jewel Crafting, Blacksmithing and the like, Supply and Demand becomes a crucial element. If it costs you 10g for the mats to make a product, then selling the item for anything less than 10g would be to make the product at a loss.

You now have to enter in to understanding manufacturing costs and working out if your return-on-investment will net you a profit. From here, you need to understand if the Supply and Demand is below, or near, the optimal level to make money from. If you have a look at the diagram below, anything that is above the point where Supply and Demand meet will mean your return-on-investment may not be profitable, or even saleable. If you can identify an item to manufacture that is below the point where Supply and Demand meet, then the odd's are people want it, and will pay you a lot of gold for it!

Og says "Make lots cheap, then sell high to make gold!"

Where WoW differs to the real world are in two very key aspects; Employment rates and renewable resources.

On the former; No matter how poor you are, you’re never without the ability to make money. Whether it is by simply grinding or questing away, you can always make money and it is simply a matter of time as to how much you have. You could consider every ‘toon’ to be their very own independent entrepreneur, and guilds enterprises designed to save money and resource the employees i.e. Raids are 'employee development' schemes that outfit the toon (Note, it is the toon, not the player) with money, gear and experience.

This is an incredibly important fact. Where the world economic crisis stemmed from elevated levels of credit and ‘paper money’ rather than cold, hard cash being traded, the World of Warcraft has a continuing, endless stream of money being poured into it simply through the playing of the game. In essence, players don’t need loans, they need quests, or at the very least grinding. And both bring in the money, which means there is no chance for the WoW economy to collapse due to overextension of credit.

Og says: 'Og went to buy food from inn but had no gold. So Og went and killed Mottled Boar, and sold skin to merchant. Now Og can feed himself!'

And secondly, there is an infinite level of resources to mine, farm, kill, skin or gather provided the player is patient and knows where to find them. For instance, no matter how many Ogres you kill, they will continue to respawn and drop Mageweave cloth. This is a key facet to the economy as a real world issue taken into consideration with products is the finite nature of supply; At one point there will no longer be the required resources or materials to produce a product.

Oil, for instance, is one of these. A concept called Peak Oil centres around a point where the demand for oil will grow to a point where supply will simply never meet demand before finally running out. Pessimistic thoughts on this read along the lines of peak oil leading to the global collapse of the industrialised civilisation followed by sharp decreases in population. Slightly over-dramatic, but a real world concern as the resource is one of the most important to the continuing functioning of our world. To put it into a WoW context, it would be the equivalent to, say, end level instances only being able to be run a certain amount of times before they simply won't respawn. If this were to happen, the entire WoW world would stagnate and collapse due to there being no ability to further gear players.

Nevertheless, end level instances will respawn as long as the game is being played. As such, there is a different path that WoW will take. A concept I derive from this and have sought to play around with for WoW purposes is the inverse of Peak Oil; Something I call ‘Item Saturation’, which revolves around the potential for WoW economies to reach a stage where there is such excessive supply of items that all demand can be supported without the ‘farming’ of new items. This would walk hand in hand with the decline of new players joining World of Warcraft, or the time in which Blizzard finally stop generating new content for the game.

A diagram explaining this is below. Og drew it himself, the clever boy!

Og says 'Too many items means Og makes no money! That's bad!'

To give you an example; Despite popular conjecture, WoW does have a finish, and that finish is achieved at the point where all quests, no matter their level, are completed and all items and characters reach a point where they cannot be improved upon. Once players reach this level, the only thing left to ‘conquer’ is the making of money, and so items that would previously have been retained for use with specific characters would actually be either sold via the AH (If it is possible) or vendored if not needed.

As such, the supply of items that would previously not have been available would be opened, and in some cases be found more freely than imagined. Coinciding with this, the excess farming of products such as Mageweave would reach a point where it would actually be just as profitable to vendor the mats as it would be to sell it on the AH.

At this point, products would begin to have an infinitely elastic price despite demand and we’d have the equivalent of a Global Economic Crisis for WoW.

A method of introducing a new economic element to the game to delay such a crisis would be the use of a cross-server AH. Of course, this would totally turn the tables on the local economy. Where my Dreadmaul would be charging me a minimum of 5g for Mageweave, it would now need to drop in order to compete with the 1g minimum that Spirestone are advertising. This would drive a high level of activity to the global economy,

This would add a completely new worth to items due to the more consistent demand for products across the realms and also raise, in some cases the supply and demand of certain mats would completely change dependent on how worthwhile it was to farm them. For instance, if Heavy Leather was selling for the same price you could vendor it for due to an excess of supply, there would be a shift in the professions of people away from skinning and towards, say, mining which was making more money. As such, the supply of Heavy Leather would drop for a period until the excess of supply finally matched demand by the marketplace. Once this occurred, the price would then rise for those who have retained their profession and continue to sell their product.

So what exactly have we learnt from this?

Og says: You need to know the economy! Come find Og, buy his meat! Og needs to buy beer for Friday night!

Well… there’s a lot of similarity in the world economy to the WoW economy. The fluctuating prices of mats and items vary greatly and are victim of the same forces that drive how much the price of milk is down at the local Woolworths.

Probably most importantly, though, is that if you have something people want, make sure you meter the supply so you can eek every last copper out of them. By controlling the supply of what you're putting on the AH, you can redfine the 'value' of a product by making it appear as though its is a much rarer resource than what it perhaps is. This will then allow you to manipulate the price elasticity to maximise your profits.

Oh, and make sure you buy my Mageweave. I need that epic flying mount.