Greedy Goblin

Tuesday, November 24, 2009

Inelastic demand and supply

There is a common belief among several AH players, that certain items have inelastic demand (and sometimes even supply) curves, meaning that increasing or decreasing the prices does not significantly affect the number of items bought. In such case it's the best to increase the prices as high as possible. Since the buyers always buy the cheapest items, the conclusion is, be the cheapest by 1 c. If anyone cuts deeper, he damages the whole market for all sellers. Such action is only acceptable if he wants to drive competition away, and re-elevate the prices back to "normal".

The logic behind this "phenomena" that defies all economical theories is that "If I get a new epic with slots, I'll buy the best gem available, no matter the cost". While it's always displayed with gems, the same logic can be extended to gems, tradeskill materials (If I need to relevel enchanting as it's the new flavor of the month, I'll buy strange dust at all cost) or practically anything.

Even if we accept this statement, there are several factors that make sure that the demand is never inelastic and the supply is even less so:
  • lolkid: while he is aware that top epic gem is the standard, but in his lolraid having any gem is considered "above average". If he see epic gem for cheap, he buys it since "epic is cool" but if its expensive, he buys lower quality gem, or doesn't buy anything "I'll buy epic later".
  • Almost equal gems: for several classes the "best" and "second best" gems are very close in terms of stats or even "the best" depends on playstyle. He can buy an SP/Spi instead of pure SP without anyone saying a word.
  • poor grinder: while he agrees that the best epic is needed and he is ready to buy it, he can only do it if he has the money in his bag. As his income is based on slow and ineffective grinding, he is always broke. It's obvious that the higher the price is, the bigger the chance that he simply doesn't have enough.
  • people with attention span longer than 1 minute: this is not the first and not the last time when he'll need that epic gem. If he is a caster, he'll need SP, SP/haste, SP/Spi, SP/Int and not strength. He will have upgrades and he knows it. If he sees cheap gems, he buys more to have some in the bank. If he sees too expensive, he picks them from the bank.
  • investors: they buy and resell for profit. If it's cheap, they buy, if it's expensive, they sell.
Supply is even less inelastic, as higher prices = higher profit = more sellers. Higher profit draws more professional sellers to the market and also more grinding farmers who get raw gems or herbs by flying in circles or grinding honor. It's obvious that every living body would craft glyphs for 50G and most kids would farm honor for 500G/epic gem "BG is fun, especially with lilKT laughing on the noobs I pwn! lololol". Also the investors stop buying and start selling as price increases.

The dogma of inelastic demand and supply comes from backward logic. I have lot of playtime with nothing better to do, so I camp the AH, so I undercut by 1c (it fits the best to camping), so I have to make up an excuse why am I a "smart seller" and not a "no lifer camping the AH with G/hour close to daily quests". The "inelastic demand" theory fits very well here.

Too bad it's plain nonsense.

PS: in case of glyphs, due to their infrequent purchases and low cost (usually less than 50G), we can assume inelastic demand. However exactly because of their low cost, these items have the most elastic supply curve, so don't bother trolling "ppl buy gylps at any costs lol", because it's irrelevant. Even if people would buy your sales in absence of undercutters, the undercutters (both deep and 1c) come swarming if the price is high.

43 comments:

Azzur said...

Ok, I read the whole post and while you talked about "Inelastic demand and supply" what you're really doing is speaking out against "auction house camping".

I'm going to apply your gold/hr theory to this "auction house camping".

As some people are aware, there is an addon called "Mail Opener" that will automatically retrieve all your mail for you while you sit there AFK.

And many are also aware of cancel macros or QA2's automatic cancel.

So, a typical "auction house camp" are the following steps:
1) Press the "cancel macro" or QA2's "cancel". AFK while waiting.
2) Walk to the mailbox and open it. AFK while waiting.
3) Walk to the AH and post. AFK while waiting.

By that reasoning, I do absolutely no work camping and my gold/hr will be very high.

debussy said...

I love how you chose gems to fit your nice theory when you actually deal with glyphs.
Gems are different than glyphs because there are 2 tiers of gems.
There is 1 tier of glyphs.
Also when you talk about the cheap cost of making a glyph, you're confusing supply and demand.

Raddom said...

It's interesting the way you form your arguement. In theory, I guess I can't do anything but agree with you.

I'm not an AH camper. I don't have the time. Strictly basing my decision off of my opportunity cost of choosing to camp the AH, or enjoying the other aspects of the game (or RL), I choose enjoying the other aspects of the game.

I love trading on the AH, but not enough to cut into my game-time for other activities. I accept the consequences of my choices, and am open to (constructive) critisism of whether my decision is right or wrong.

debussy said...

How about this.
One week we sell glyph of sap for 50g, and another week we sell it for 50 silver.
Both are going to give you 0 sales. How's that for elasticity.

Or what about a popular glyph. How popular is it really?. Glyph of Exorcism seems an above average glyph. Let's sell it for 30g on a Tuesday, then at 6g next Tuesday. How much of an increase in sales are we going to get?
Care to Speculate?

Anonymous said...

There isn't any point in posting any comments really. After reading this blog a long time (and seeing it go from a fairly decent gold making blog, into a random rant blog) it's pretty obvious that our goblin is more concerned with posting all his opinions about more or less everything. God forbid that he might me mistaken, that's impossible, and anyone who comments their disagreement are obviously "M&M's" in his book. God forbid anyone disagreeing with the mighty goblin.

Anonymous said...

@debussy

Glyph of sap is a fucking horrible example, why did you even mention it? To prove a point about a glyph which does not even have a demand?

As for the glyph of exorcism, 30 gold to 6 gold won't have much difference. Everyone will obviously have the 30 gold to spend on the glyph. The only point of undercutting in this case is to reduce competition by driving some off and going below the threshold price for QA2.

However, in a case of lets say a blue SP gem for 80 gold VS a green one for 1 gold or a guildie crafted one for 30 gold. In this case, there will demand is definitely elastic.

Anonymous said...

To the morons who figure that people will buy anything regardless of the price.

We're here.

When I say we. I use describe those that supply the auction house. No... not that one guy that farms saronite 12 hours a day. Nor that chinese herb-bot that's busy stacking 50 auctions a day.

But the people that stand between that guy and you, I get up in the morning and have my breakfast at the keyboard buying things as they come off the boat from China... I have every trade skill, I'm constantly sniffing about the AH for a deal, and I'm constantly listing things at what -I- consider fair value. I'm very careful about what I paid for something, and even more careful knowing how much something is 'worth' based purely on the cost of its raw materials.

To me, that epic gem you're selling for 250g? Its worth exactly 120g, the price I paid per gem for the three stacks I have waiting in my bank. No more... no less. This doesn't mean I won't sell it for 200 if the opportunity arises. But why should I sell it for 249.99.99, why should I give you even the slightest opportunity to undercut me? When instead, I can make the market unprofitable for you... and when the water boils... you'll leave and I can charge any price I desire.

I don't care about 'the market', I care about my bank account. I may only make 30-40 gold a sale on those gems... But I sell forty of them every day of the week, and that's only one of the markets I play.

I've lost track of the conversations I've had with people who cry that I'm losing money and ruining the market. I've ran out of breath trying to describe the why and the how. Hell, I've had people cry that they were going to 'report me to the GM's'... but I'm still here, and I'm not the only one.

Anonymous said...

A lot of people seem to be missing the focal point of the whole post - the higher the prices are, the more attractive the market appears to your potential competition. While your typical player will pay any price (even 200g) for a glyph he needs, the price makes the market too attractive. Eventually, even your typical M&S would have to ask why it costs so much and end up competing with you.

I do not have the time nor patience to play the AH camping game, much like Gevlon. I also don't spend any time obsessing over my competition. I don't have any of them on my friends list, I don't keep track of who is undercutting me and when, but I still make sales. Quite a few, actually.

I started out trying to compete with all of the QA2 kiddies, and had ridiculously high fallbacks with low thresholds. I would cancel and repost endlessly, but it hit me that my competition was scoping me out. They waited until I logged off, and undercut me moments after. Once I realized I was playing a game I could not win, the only thing I thought would work would be to make the market less attractive.

So I don't sell a single glyph for more than 10 gold, and my threshold is a mere 20s above my cost to produce. For the first 4 weeks, sales were pitifully low. Clearly, my competition was not at all fazed by the fact that I undercut all of their 50g glyphs down to 10g or less. They continued to undercut my mercilessly, at least one of which I was fairly certain was posting below the market cost (that is to say, they had a cheap herb supplier and were basing their glyph threshold on the below market value herb prices)

However, over time, my sales increased. What used to be an average of 180g every two days (miserable, barely covering raid expenses) has now become at least 500g every two days, and it has steadily increased as the weeks have gone by. The only reasonable conclusion? Less competition. My average price per glyph has been creeping up, and I have simultaneously gained a larger share of the market in the process. While it is still insanely profitable (i'm making up to 500% profit on every sale), my price point is low enough that anybody can afford it (even an M&S can realize it only takes 3 daily quests to pay for a set of glyphs), and is also low enough to seem unattractive to potential competition.

As somebody who came late to the party, I can safely say the following. I had no money coming into this, I only leveled inscription at first to bypass the rep grind for a shoulder enchant. I used to slave away at daily quests and clearing out incomplete zones to cover my raid expenses. But your posts inspired me to try and make money with the profession, so I persevered. The whole time I was vulnerable and it wouldn't have taken much to make me go away. But I got lucky - my competition made no effort to push me out, and I managed to scrape by long enough to set up an industry that now ensures I will never have to do a daily quest again. Thank you, Gevlon.

Spitfire of Spinebreaker said...

I agree with you partly. There is no such thing as unelastic demand. Some markets are more elastic than others, though, and I know for a fact some people will buy epic gems almost no matter the cost. I am in the gem market myself, and I operate with a threshold about 30g over raw gem price and a fallback as high as 400g, 3-4 times raw gem price. And trust me, gems do sell at those prices. I might sell less of them than I would at a lower price, but the massive profit for each sale makes up for that.

Now, I simply don't care if someone undercuts me drastically or drives the price through the ground. I simply don't post a certain gem if it is unprofitable, knowing that they will reset in a couple of days. I've got better things to do than watching prices carefully and yelling at people who's market strategy doesn't make sense.

Anyway, I believe that the "best" way to play the gem market is to use QA2 with very small undercuts, and post a lot of different gems at a time. It takes me a minute to check the AH for cheap raw gems, and another few minutes to get my unsold gems from the mail box and recraft whichever ones did sell. And my net profit is several several hundred gold for each of those cycles. You always get people who cut the prices stupidly low, and you don't want to compete with them. You simply can't drive people out of the gem market with stupidly low prices. The high deposit costs also make a camping war highly unfavorable.

Wooly said...

The problem is, you can never tell when you missed a possible sale if your price would just have been a bit lower. Only statistics can give an idea over a long period of time and testing.

High prices do generate sales, but only because there are always people that can't wait, have so much to spend they don't care, or are simply idiots (like the resilient parchment buyers). Even ridiculous prices will eventually get a buyer. These occasional sales might seem enough "proof" to many that items will be sold at any price. And in a literal sense that is true, but it encourages bad thinking.

What the thing is you should keep in mind is your target "audience" (by lack of a better word). With high prices you're only targeting perhaps 20% of the interested people. There's 80% left that are walking away.

Yes, this is all supply and demand basics, but they should be understood. Demand isn't just "whenever it sells".

Demand WILL rise when lowering the price, it's as simple as that. It's just not linear compared to the price. To get the 100% of the interested to buy you probably have to give it away, going to mats price will probably only leave 70% of the interested left, but supplying to only 20% of the interested is also a waste of profit.

Find the optimal spot in the price vs potential buyers curve, don't settle for "highest ever to generate sale", get more people to buy. It's pretty simple. Most people know when they're being ripped of.

And so do you, so always ask yourself before posting:

Would I buy it for this price?

Anyway, I'm preaching to choir here I think..

Daniel said...

I think that the whole glyph making community has it wrong. The glyphs pricing strategy depends on one thing only - the amount of ink you have at your disposal. if you are short on ink (less then 2000)- small undercuts are the way to go - if you have comfortable stocks(2000-10000) - deep undercutting. if your farmers have dumped 2000 stacks of icethorn last weekend and you are pouring ink from your nose - carpet bomb.

Okrane S. said...

No.

For each and every product in this world or the paralel one (wow) demand is ALWAYS INELASTIC, or at least partially inelastic...

The pictures at wikipedia speak for themselves:
http://en.wikipedia.org/wiki/Price_elasticity_of_demand

A perfectly elastic demand means that an increase in supply does not diminish the price, i.e. the market is ready to absorb everything you give.

A perfectly inelastic demand means that people are willing to pay whatever cost for an item.

In reality things are in between. And the truth is there are price ranges in which demand is inelastic, i.e. be it that you sell for x or for y you will sell the same number of items provided that you are the only one on the market.

So I strongly disagree with Gevlon on this one. Keeping prices low is a measure to take out the competition. If there was no competition around, I assure you those glyphs would sell at 50g each like hotcakes.

Of course, as the demand is only partially inelastic, you would sell less glyphs, but they would yield a much larger profit.

Selling low has nothing to do with elasticity of the demand. If you identify that price range in which the demand is inelastic and sell at the max price contained in this interval it would maximise your revenue from this point of view.

Competition is a whole different deal.

So I believe its time for you to rething this post, because it is wrong.

Anonymous said...

well...you seem to know something about economics, but not enough to get the key.

1. Your favourite "G/hour" is bullshit. You make 5k gold within 2 hours of work / week, great. But if you want to get more gold, your g/hour drops for sure, becuse you have to post more often than 48h auctions to get more sales.

2. The only way to PROOF your elastic / inelastic hypothesis is to proof it empirically. Your discussion seems to be right, but there is absolutely no reason to trust you more than the other sellers who postulate an inelastic demand.

The problem is that you can´t proof this in WoW because you haven´t the possibilities to check AH sales of the whole market.

Anonymous said...

This is one of Gevlon's best and most accurate posts recently.

While most players will acquire the best glyphs regardless of price for their main toon, they often will not buy expensive glyphs for their alts (of which many players have several). Also, if prices are high for glyphs, many players will look for a guildie to make a glyph (easier to pay a guildie 10 gold for a glyph than pay 50 gold on the AH).

So yes, even in the most inelastic market in WoW, glyphs, there is still a significant amount of elasticity. And I never even considered the supply side of elasticity that gevlon mentioned too.

All around this was a great post and changed my perspective on some things.

Phil said...

Well, when is the blog going to return to profit making, rather than whimsical musings of human behaviour in a micro economy?I know human behaviour affects market forces, but nobody on the planet can expain fully how hat will occur. If you think you can, you're operating in a gamblers fallacy. I hope we are going to get back to profit making soon, and less pointing and laughing. Economics lessons are for other blogs, this is a wow micro economy that we just want to make virtual gain in, a vanity economy.

Anonymous said...

Gevlon is right about this. Just try this thought experiment:

All "glyph of sap" are listed on the AH for around 50g. There are lots of 1 copper undercutters but the price is still around 50g. Johnny needs this glyph, and has the gold. Johnny buys the cheepest glyph listed. Johnny is a hardcore raider and absoultely needs Glyph of Sap for his raiding spec.

Mary who is just browing the list of potential rogue glyphs comes across "Glyph of sap" but doesn't buy it because it is 50g. She has the money, but she isn't going to pay 50g for "Glyph of sap" as she could purchase a different glyph which would be almost as usefull for 3g. Mary is a more casual player, probably playing an Alt. She doesn't need the best, she just wants a glyph.

Now the AH has 95% Glyph of saps priced at 50g. One person posts the remaining 5% at 20g. Both Johnny and Mary buy Glyph of Sap. They both get the Glyph the really wanted. What rogue wouldn't want Glyph of sap?

Same thing with Epic gems vs. Blue gems. Same reason why WOW is so popular. It is a casual game. Not everyone will pay 50g for a glyph just because that is the price on the AH. Most casual players don't care about the MIN/MAX raiding game. Casuals will buy the cheepest "upgrade" they can find.

There is also a bit of marketing going on here as well. When a player finds that the AH is selling the majority of a specific item at 50g, and there are s few listed signifigantly lower, for example 20g. The player sees this as an opportunity, almost like the black friday sales coming up. The player doesn't want to pass this 20g glyph by because they think they won't have the opportinity to buy this cheep again. So they buy it on impulse. Almost with out thinking. Had this item been 49g, with the majority of said items being 50g. This shopper would not of have purchased it.

Lowering your price gives you more opportinity for sales. That's why stores have sales.

Anonymous said...

You need to get your facts clear about elasticity. Generally, elasticity of supply is p inelastic and elasticity of demand is pretty elastic.
You're arguing with inelastic demand when clearly mean perfectly (or near) inelastic demand

Anonymous said...

To quote another commenter:
"A lot of people seem to be missing the focal point of the whole post - the higher the prices are, the more attractive the market appears to your potential competition."

I guarantee you there isn't enough demand to double or triple the price of a glyph/gem for an extended period of time.

debussy said...

@Anonymous
This post was talking about demand. How does the fact that you have 1 or 20 competitors posting affect demand in any way?
@liene
Thank god there was somebody else who noticed why this works with gems but does not apply to glyphs at all >.>

Anonymous said...

@debussy,
Gems, Glyphs. Makes no difference. Think about this. I'm an arcane mage and I need a glyph as I just hit level 80. Glyph or arcane missles is going to be the highest increase is over DPS. Glyph of arcane missles is 50g. Glyph of Mirror image is a smaller boost in DPS, and only costs 5g. Unless I'm a hardcore raider that plays the MIN/MAX game I'm going for the 5g Glyph. This is for the same reason I'm buying the Perfect green gems over blue gems, or epic gems.

That's your tiers for glyphs right there. It isn't as obvious as Gems, but it is there. The fact that this is less obvious is even more of a reason casuals would buy a cheeper glyph. They see no difference between the two priced glyphs so OFCOURSE they go with the cheeper glyph.

debussy said...

@Anonymous,
So you ARE in fact saying that if you were a rogue and I raised EVERY rogue glyph to 50g and I left glyph of sap at 50 silver you WOULD buy glyph of sap over the other rogue glyphs....

Anonymous said...

There will always be people willing to sell below your price. They may be willing to take a loss. They may just be willing to work for less gold per week than you. 95% of my server's glyph market is below 3g per glyph.

Anonymous said...

@debussy he's saying that if you raise all rogue glyphs but sap to 50g, you'll have a few sales (lower volume than if you'd picked 40g, say, because the demand IS partially elastic) until everyone on the server undercuts you. and eventually you'll run out of capital if you try to play monopolist. in the mean time, people will do without good glyphs, turn to guildies or start "lf inscriber" in trade. you can't remake the market as you see fit because there are no barriers to entry.

The Gnome of Zurich said...

This isn't completely a straw man, because there are idiots who think price doesn't matter at all.

But you haven't address my point that demand and supply curves are not simply straight lines, and that a 5-10% cut in price from market really does not make much difference in demand or supply in most cases. There are dramatic differences in demand when you get into "friend pricing" or "profitable to resell" pricing range, and there are dramatic differences in supply when you approach the zero profit range.

But the guy who can get his friend to give him a gem for 50g is not going to pay 90g on the ah anymore than he will pay 100g. He might pay 60-65g so as not to have to wait and trouble his friend or worry about whether s/he has the item, but the potential buyer who will never buy for 100g is also extremely unlikely to buy at 90g.

Similarly, the seller who will definitely undercut you at 100g is also extremely likely to undercut you at 90g (unless the raw gem sells for 90g or very close in which case why would you cut the gem to sell for 90g in the first place?).

Of course, if there are drastic differences in price, that will change demand and supply. But small differences in price make small differences in supply and demand unless they are on the cusp of some important competitive threshold (such as am I 1c lower or 1c higher than somebody else with an auction up, am I very close to the zero-profit point for suppliers, am I very close to profitability thresholds for resellers).

When you aren't at these thresholds, cutting your price may raise demand and lower supply, but it is very unlikely to do it by enough to make cutting your price give you more profit.

Why? Because price cuts go directly to your bottom line.

If I am cutting gems for profit, suppose I buy gems (or could sell them raw) at 80g, and can usually sell for between 90g and 110g. Today my competition is on the ah at 100g. So I make 19g99s for each gem I sell if I list it at 99g99s, and if I list for 90g, I will make 10g per gem.

the question is, will I sell twice as many gems at 90g as at 99g99s. if so, it makes sense to list them at 90g. If I would sell only 1.5x as many gems at 90g, then it makes me more gold to sell at 99g99s and forego some sales.

My experience is that if 90-100g is within the standard market spread and both are profitable to supply at, and it is not profitable to resell from 90-100g (because of deposit risk), that yes, you sell more at 90g, but nowhere *near* enough more to justify the loss of profit per item.

You will of course sell a *lot* more often at 80g since few people will undercut you and somebody might choose to buy to resell, but to do that you are accepting zero profit. Something you would only do if you are just trying to get rid of the item and don't care about profit.

The reason the drop from 90 to 80 makes a bigger difference than the drop from 100 to 90 is that you are now at one threshold (the zero-profit threshold), and close to another (the buy-and-resell threshold).

You talk about economic principles, but the fact is that I'm using principles learned from real world economics and pricing theory. If I priced business cards and stationery (my day job running an actual business) like you suppose I should, I would be leaving outrageous amounts of money on the table and get very little extra business. Is the price completely inelastic? no, of course not. But for most people, the difference between high-market and low-market pricing is nothing, it's all about the service you deliver. Only a small minority of our potential customers are willing to accept the poor service of our low priced (and much smaller) competitor in order to save 15-20%, and it's simply not worth giving up the 15-20% premium on all our other sales to win them over.

Roboticus said...

Most people, including Gevlon, are conjecturing flowers into the wind here. This is NOT a theoretical question, nor is it one about postulating behaviors.

Crunch the numbers, calculate elasticity (assuming a significant result), post results, DONE.

I don't see any way that one person's conjecture about elasticity is any way better than another's conjecture. Unless you've done the numbers, your words are wasted.

FWIW, I've calculated this on my server and found that the elasticity varies greatly depending on the good. Glyphs are indeed almost perfectly inelastic (over the price interval observed), gems are more inelastic than I expected (though not as much as Glyphs). Epic ToC items are extremely elastic. To try to fit it to consumer theory by comparing raid-advantage vs. expense, it does seem people are acting according to maximizing utility with a relatively high discount rate.

William said...

There are plenty of people who are serious about their glyphing/talent spec, gear, etc but are M&S with their gold and spending. In fact I'd argue that over 95% of raiders make terrible decisions with their WoW gold, because simply they DO NOT CARE about a virtual currency that basically falls off trees (i.e. dailies). That does NOT mean they do not min/max their gear. They will still buy the epic gems, flasks, get appropriate glyphs for their class and such, just so they don't look bad in the eyes of others.

This is probably the largest market for nearly every consumable in WoW (gems, glyphs, enchants, etc). And this is why I disagree with you Gevlon. These people barely care what price they buy something at, because they don't care about their gold. These are the people who keep demand relatively inelastic for most markets.

Anonymous said...

Yeah, you can't compare the market for gems with the market for glyphs.

In regards to both, however, I've noticed certain trends in my own purchasing behavior.

If we're in the middle of chain raiding (Toc25 -> Ony25 -> VoA25 -> Uld25, for instance, which is a typical Wednesday in my guild), if I get an upgrade, I'm going to have about 10 minutes between killing Onyxia and starting VoA in which to gem and enchant the new piece. This means that if I want to use my new gear, I need to get the correct gems for it ASAP. If the normal/median price for SP gem is 180g, but I see it cheapest for 190g, I will likely buy it anyway. Unless there's an uncut red, in which case I'd buy that and get someone in my guild to cut it for me before we begin. Or, if everything is ridiculously expensive, I hold off until after the raiding ends to work on my gear.

Glyphs, however, are only really purchased by a) people who are leveling and b) people who are respeccing. There is a bigger market for minor glyphs and high-level glyphs because minor glyphs can change without having to respec (i.e. deciding you really don't need that Glyph of Horn of Winter after all, and would rather get something else) and the high-level major glyphs are purchased at higher levels, when people have more gold to throw at the AH.

Oftentimes glyphs can have an enormous effect on how you're playing, your abilities, etc. Gems only make your stats better, enhancing damage or defense, etc. Ergo, people ARE more likely to pay what is asked for glyphs because they're more URGENT, especially if they're respeccing (e.g. I just respecc'd my priest from holy to disc) and need to play the spec. You don't necessarily need the gems to play properly.

That said, I went hardmode with my toons; I have a tailor/enchanter and alchemist at max-level and I'm leveling a jewelcrafter, inscriptionist, engineer, and a leatherworker. This way, I can make my own items. I have NEVER paid for a flask for raiding. I have NEVER paid for an enchantment. But I do sell my skills often, and this way I only make a profit.

Protip: Go farm shoveltusk flank this week. People are too lazy to make their own Tracker Snacks.

Kevan Smith said...

@Roboticus : Please post your numbers.

For those wanting to actually calculate elasticity, here's a good tutorial:

http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm

Salgoud said...

@JT

I'm an economics major, and almost everything that Gevlon has said follows basal economic theory.

I invite you to show where it is that he has gone wrong, so that I can rip your stupid arguments to shreds.

------------

The simple fact of the matter is that given a freedom of information, firms will enter markets that yeild them the most long-term profit (given enough capital to finance the buying of assets). There are ZERO profits made in an medium-run equilibrium market, because each firm is making a salary, and that salary is equal to what they could be making elsewhere in a medium-run equilibrium.

In the short run, where profits are being made (profits by economic definiton means making more money than one's salary), more firms enter the market, as this market is one where the entering firm can make more money than their old one, due to either a shift in supply or demand.

Then, the profits decrease to zero, as they are all split between the new number of firms, as we reach a medium-run equilibrium again.

Now, here's where Gevlon's ploy comes into play. He comes into the market because he believes there to be a profit to be had. He increase the supply of glyphs, and decreases the profit of every firm, that is to negative profit. So firms, noticing that they can make gold in other markets, leave the glyph market for one that can make them more long-term profits (such as jewelcrafting or tailoring or enchanting).

This is the essence of Gevlon's post.

If anybody would like to argue it further, I'll back up my statements with well-known graphs illustrating why firms leave the market, and which ones do. Just let me know :)

debussy said...

@salgoud

can you prove glyphs have any significant elasticity whatsoever?
Nobody is questioning that if you raise prices you invite more competition. We are just saying that if you sell a glyph cheaper it doesn't guarantee more demand.

Anonymous said...

Take a REAL MMO example.

Eve online. When Heavy Assault ships cost 250mil+ because the players who built them had a monopoly and ripped people off, hardly anybody flew one. People would be lucky to sell 10-20 a week.

Now that the game has changed and almost anybody can build one (if they have building skills etc), they are commonplace and sell by the thousands.

Cheap brings in the masses, and in the case of eve, ships get destroyed permanently, so the market feed into itself by creating new demand.

Its same with wow. Do not rip people off and you will make a fortune.

debussy said...

@Anonymous

Ships are to EVE as gear is to WoW.
You can't compare gear with glyphs. That's like comparing the cost of sugaar and DVDs...

Ratshag said...

@Salgoud -

"I invite you to show where it is that he has gone wrong"

Where Gevlon has gone wrong, as he often does, is claiming not only expertise, but the highest expertise, without having any data that is more than anecdotal (or possibly completely made up). His conclusions do not match the ones I have based on my JC experience, and I see no reason to believe that he is right and I am wrong.

Salgoud said...

@Debussy

Can I guarantee more QUANTITY demanded? Yes, and No. I can show you my auctions listed from Auctioneer that show a greater number sold at lower prices, but this can be because of a mixture of the two factors. (demand and supply curves). In an overall sense, yes I can prove this curve is not purely inelastic, as at a certain point, the glyph costs more gold than anybody can value. But at the lower numbers we're talking about, I'm sure it is elastic, just based on my own preference curve. Not much, but it's definitely elastic.

However, by dropping the supply curve to a curve that is supplied almost purely by one firm, the profits for one firm are tremendous, regardless to what the demand curve's elasticity is.

It's called a monopoly, and it has been employed by Rockefeller (arguably the ricest man in US history) who dropped prices like crazy to keep a hold on the market.

The demand will be the demand. Control the supply, and watch your salary skyrocket.

----------

@Ratshag

State his conclusions, as well as yours, please. I'd like to see them written out by you so that we don't have different ideas of conclusions.

Anonymous said...

Comon folks, lets stop being silly.

Rip off prices reduce customers drasticly. Insted of selling 10,000 you might sell 50-100.

Thats just how rip off prices work. If prices were cheaper, then people would buy more.

Look at glyph. If I see a glyph at 20g+, I just ask a guild mate and boom - glyph for like 5g max for free.

Even people in trade sell glyphs for 5g each.

That guy with a 200g glyph simply kills the market for himself. If he sold at a non-ripoff 10g per glyph, I would actually buy insted of asking a guild mate.

Look at real life - rip off prices remove customers. High oil prices means people walk or use a bike insted of a car.

Orcstar said...

Speaking as a buyer:
I'm a tank, different tanks require different glyphs, I'm a min maxer and I will absolutely get the glyph or gem I want.
Well.
I'm in a guild and we basically have all professions covered.

I thought that glyph that I wanted was really worth the 60 gold. Until I found out about the material costs. So, instead I now buy stacks of herbs and have our scribe make me stacks of glyphs, I'm forever lost for the glyph market.

Same for gems. All recipes are covered and if not: on the long term it's cheaper to give your guilds jewelcrafter gold to buy the recipe. That's what I did.

Basically it comes down to this: if prices onn the auctionhouse are too high, me (and other people) are going to try find other ways to get their stuff.

If I want something I want it now, but not at any cost. If an enchanter asks 50 gold for their services, I'm going to wait till my guilds enchanter logs on. If it's 10 gold, I'll happily pay it.

There are other ways to get what you want and if prices are too high, those people are lost for the market because they're going to find out of market ways to get their things.

If prices are low, I can get my stuff now.

I sell arrows and bullets on the auctionhouse. The fact that for a long time I was the only one doing that gave me the freedom to experiment with the price.
At 25G/stack they would sell. But at 10G/stack they would sell 20-30 times more.
I asked a hunter in guild and if arrows are too expensive, on the trivial fights he just uses vendorarrows and only uses the good ones on the fights that matter. If prices are relatively low, he uses the good arrows for everything to "pwn the damagemeters".

debussy said...

@Salgoud
"Can I guarantee more QUANTITY demanded? Yes, and No. I can show you my auctions listed from Auctioneer that show a greater number sold at lower prices, but this can be because of a mixture of the two factors. (demand and supply curves). In an overall sense, yes I can prove this curve is not purely inelastic, as at a certain point, the glyph costs more gold than anybody can value. But at the lower numbers we're talking about, I'm sure it is elastic, just based on my own preference curve. Not much, but it's definitely elastic."

The data from auctioneer is meaningless because we're operating in a market with unlimited supply. Prices will always go down, since you're always undercutting competition. So yes, if you look at a year worth of data, you will have a larger volume of glyphs sold at lower prices. Resets don't happen that often.

The question is, Gevlon undercuts by 60s. Does the customer give a fuck if a glyph costs 24g99s or 24g30s? How many extra customers are you gaining if you undercut by 60s vs 1 copper? (and don't mention that you get less competitors, we're discussing demand, not supply)

Salgoud said...

@Debussy
"The question is, Gevlon undercuts by 60s. Does the customer give a fuck if a glyph costs 24g99s or 24g30s? How many extra customers are you gaining if you undercut by 60s vs 1 copper? (and don't mention that you get less competitors, we're discussing demand, not supply)"

There's a few problems with your anaylsis.

First, you're using Gevlon's tactics with supply to show demand. He doesn't control demand, he observes it and other firms, and adapts to it to push profits to subzero.


Secondly, having a 60silver undercut will effect how much is sold, as that's just a basic principle of economics. As price lowers, quantity sold will increase. The tangibility says by how much. There are scenarios where people will pass on glyphs, because not everyone has money to spare. Leveling characters will pass on higher cost glyphs.

Thirdly, you're using a high price glyph where the relative change in price is <5%. From my research, most equilbrium prices I've seen are around 8-10g. 60s undercut then tends to be quite more dramatic.

Lastly, you're only concerning yourself with demand. Try to look at supply as well. By decreasing your prices, you increase quantity demanded (I don't care by how much, I'm just saying it's an effect that benefits you, regardless to what degree), decrease competition, and increase profits for you alone.

Sounds like a win situation.

What're we arguing over again?

debussy said...

@Salgoud

The reason I left supply out of the question is because there is no disagreement there. I agree with everything you and/or Gevlon said about supply. I am a heavy undercutter myself, and I have very low fallbacks precisely to discourage others.

With demand however, it has been my experience that while Glyph X might have more sales than Glyph Y, that is largely based on the purpose of the glyph rather than it's price.
Generally the cheap (sub 1g glyphs) glyphs on the AH are cheap because they are worthless. If customers really based their choice of glyphs on sale price, then those 50s glyphs would clearly get preference over the 20g ones.

Salgoud said...

@Debussy

People do make their decision based some on price, but this is only 10% (rough estimate) of what deep undercutters in the glyph market are trying to accomplish.

Honestly, I think you're overestimating to the degree I think the elasticity of demand is, I think I'm overerestimating to the degree you think the inelasticity of demand is.

I think in that in deep undercutting, it's 90% market control, and 10% market price. When you're cutting from 50g to 10g (as we see from the M&S posts about hate mail), you're trying to drive away competition, but also trying to increase your quantity demanded, if only by a little.

Lastly - I never said anything about the elasticity of demand in my original post, so why bring it up? My and Gevlon's post is that it really doesn't matter.

debussy said...

@salgoud
I sell my glyphs for 3g if there are other people trying to sell that glyph, and 5g if I'm the only one on the market. How is that for deep undercutting. I'm unchallenged in about 60% of the market because hardly anyone can keep such low costs. Yet I'm not selling as well as I'd like. I had 10 thousand Ink of the Sea a few days ago, i have 12 thousand right now. No matter how many glyphs I put on the market every day, I only sell a certain amount. Demand for glyphs is limited, and that limit is not their price.

Salgoud said...

@Debussy

Did you just ignore my post entirely, except for the out-of-context part where I said price matters?

Price does affect amount sold. Drop your glyphs to 1 silver each and watch what happens.

Just because people's marginal values are beneath your selling price doesn't mean that there is a limit on demand. There is a limit, but you're vastly overestimating it, and yes, price does affect the limit greatly once you hit a certain point. Demand curves are inverse equations. Just because you're above it doesn't mean that you've hit a limit.

The is the last comment I'll be posting in reference to you, as you seem to blow up small parts of my arguments and blatanly ignore others. I asked you two questions so far, and I have not received an answer for either, and you continually have zero economic-based answers for the proofs I've listed. You're arguing over something I never brought up, and seem to think that I should take the point that's not yours.

Good day.

Jyi said...

There's a very good way to make people realize why selling glyphs (for example) at high prices just doesn't work.

Whenever someone asks me to sell glyphs for "as high as he is selling" and tell me "they will sell no matter the price", I simply ask "would you buy them?". No one has ever answered "yes".

Absolutely no one wants to buy glyphs at 50g and it's a rare occasion someone is stupid or desperate enough to actually pay that much. Granted, it happens, but when the AH is full of people selling at 50g, only a handful of them get their glyphs sold. Same can be applied to anything sold in AH.

Lower prices encourage people to buy more often. Lower prices "create" demand. Especially people who have a hazy understanding of their expenditures. Often they think it's ok to spend 50-100g once a week on 5-6 glyphs but not ok to spend 300-400g on glyphs at once. They end up spending more money per month, but they feel they get substantially more bang for their buck, they feel more happy and free. Same thing works in real world, "it only cost 50 cents, so it doesn't matter even if it's useless".

'Cheap, yet profitable' works well on most items. Anyone with any smarts plans his spenditures way before he actually needs something.