Greedy Goblin

Thursday, August 12, 2010

Value in flipping

One of the most important income sources in the life of the businessmen of Azeroth is "flipping", buying underpriced items and immediately relisting them higher. Some people claim this activity to be "immoral" or "evil", since it provides profit for "nothing", it's practically "stealing". I'd like to prove that flipping is good for the society.

Other AH operations have some ostensibly useful element of
  • work (like the smelting or disenchanting)
  • transportation (moving items between vendor and AH)
  • storage (buying items now, keeping them for longer period in bank and selling when need comes)
On the other hand flipping has no ostensibly useful element. Before flipping the item was in AH, after flipping the item is still in AH, but for a higher price. The flipping does not affect the seller, his underpriced item would be bought one way or another. It affect the person who finally buys the item. For the first sight flipping seems to be a zero-sum game. Because of the flipper the buyer can only buy for higher price, the price difference is the profit of the flipper and the loss of the buyer.

This would be true in a 3 man case (seller, buyer, flipper). However there are lot of buyers in the AH. Some of them have the money (and the will) to pay the market price, I call them prime buyers. The others want the item, but cannot pay the market price, they are sub-prime buyers.

As soon as the underpriced item placed to the market, its fate is decided by luck (as opposed to market factors). If you find it first, you get the item and also can keep the difference between the "underprice" and the market price. If the sub-prime guy finds it, the item disappears from the market. Notice, that this is not a "proper" demand, the sub-prime guy could not buy the item if it would be properly priced. So underpricing creates new buyers, decreasing the amount of items on the market.

The result: you will not find items to buy or just overpriced ones. You can check AH often (cost lot of time), gamble (you hope to get lucky) or buy one of the always existing overpriced items. Notice that the third option causes elevation of the prices since the seller of overpriced item will not be discouraged from selling high.

The flipper buys the underpriced item and relist it for the proper price. This have two effect:
  • the sub-prime guy cannot buy, so the item won't be lost for you
  • you can buy normally priced item, so the overpriced ones will not sale so has to be relisted at normal price
The following figure shows what you find in the AH after some sub-prime buyers (poors), with or without (w/o) the activity of a flipper. As you can see, with flippers you have more items available in the market value region.

So the flipper is actually does the buyer a service: protect the item from sub-prime buyers, making sure that it's available for prime buyers. The cost of this service is losing the chance of getting a bargain sometimes.

Of course if there would be no dumb sellers who list their items too low, such service would be not needed, and not existing.

Important note: those who buy items on the AH and relist them high above the market price are not flippers, but wannabe monopolists. They may get lucky, but if there are enough businessmen on the server, they don't.

23 comments:

Jana said...

The game is not that simple.
For more realistic model, you have to consider at least the following participants:
- Underpricer
- Flipper
- Market value seller
- Wanna be monopolist
- Poor buyer
- Prime buyer (market value buyer)
- Retarded buyer (buys overpriced stuff)

The input data is % of each type of participans weighted by their marked share (the items they focus on) and active hours spent at AH.

The output data is some kind of demand satisfaction number of each type.

I know you want to ignore the satisfaction value of the poors (Black Friday shopping, anyone?) and the retarded (pretty much socials that buy 1000%+ overpriced stuff to increase their selfesteem among the peers). Still both of these cattegories are substantial part of both real life and WoW markets.

Grodus said...

Very thoughtful post. While flipping I always felt there was a purpose to it other than making gold and this makes perfect sense.

Andru said...

While I agree with you post, I don't agree with the 'dumb sellers who sell for too low part'. This rhetoric irks me on the forums, and it's surprising to appear here, you being an advocate of deep undercutting.

If I sell at average market price, my buyers would be only prime buyers.

If I sell at a lower price, my buyers will be prime buyers, sub-prime buyers AND flippers.

It does not matter to me, as a seller, in the least where my money comes from.

Selling below market price creates demand from all these people, and also limits what competition is able to match my low price.

Besides, what market price is, is only an equilibrium at a certain point. If I'm good enough to make a profit with a high g/hour threshold at a lower-than-market price, I would be a fool to play 1c undercutter in market price range. Smash the price, drive the competition out, get money from primes, sub-primes and flippers and collect lots of gold from mailbox.

Can't see what's so dumb about that.

French Guy said...

I'm a flipper as well, but let's be honest: I don't do a service. I just cash-in the money.

The service you're talking about is not "done" by flippers. The service is just a side effect from what we do.

Eric said...

Andru, you are describing a situation where the market price is too high and by pricing lower you are moving it to where it should be. (because you still profit).

Gevlon is spot on with this post. One of the best features of capitalism is that scarce goods are directed to the people for whom they are most valuable (as measured by willingness to pay). When transactions occur below market price for scarce goods that get consumed, it introduces economic inefficiency (dead weight loss).

altaholicsdiary said...

@Andru

I think he is talking about the "rare" items such as Epic BoE gear for example or difficult to craft epics and such, not crafting markets like Glyphs, Flasks, etc. Flipping crafted items is just a silly idea and I have seen a number of people attempting to do that (even off my own goods which is quite funny when they buyout all 4 my items of a type, I post another 4 they buyout, another 4 etc).

For mass item selling from crafting professions you want to sell in quantity. But with rare items flipping can work well simply because your odds of being undercut are low and the market is actually quite small comparatively so you need to markup enough to justify time spent trying to sell.

Anonymous said...

you argument seems to be slightly circular.
the market is better because you act like a proper market force.

and flipping, is essentially http://en.wikipedia.org/wiki/High-frequency_trading
which adds absolutely no value whatsoever to the system.

however the point of flipping isn't to do a community service its to make money, which it does but not a humanitarian.

@ grodus there is no purpose to it you take something and resale it for a higher price extracting the difference, you leech of someone else work (and possible exploiting his stupidity) but you are in no way doing anyone but you a service.

Phil said...

Is this a test?

There is so much here that is inconsistent with your previous posts that I can't help feel this post is either sarcastic or deliberately misleading. The last sentence alone almost convinced me:

"Of course if there would be no dumb sellers who list their items too low, such service would be not needed, and not existing.”

How many times have you railed against people who call your deep undercutting method “dumb” ?? And now this is how you refer to yourself? I’m confused.

However, defending a practice, which at its core can be described as “manipulating the market to ensure poor people cannot afford an item, for the benefit of richer people” as a valuable service is pure Gevlon, so maybe you’re not joking. I really can’t tell.

Phil said...

Also, in addition to the post being inconsistent, it’s also plain wrong.

There is no such thing as a Prime buyer and a Sub Prime buyer. There is no organized system where people with less money get an allocated time slot at the AH before people with more money. If a “Prime” buyer arrives at the AH when there is an underpriced item, he will not ignore it and buy the more expensive “market price” item. Undercutting drives down the average price for all buyers, therefore all buyers benefit. Flippers only act in their own interest. I’m not saying this is necessarily immoral, but to justify it as “providing a service” is plain incorrect.

PS – Nobody should bother with any argument about elastic demand, it may normalize the price a bit but it won’t take it back about the original price or you’re talking nonsense.

penuruloki said...

"If I sell at average market price, my buyers would be only prime buyers.

If I sell at a lower price, my buyers will be prime buyers, sub-prime buyers AND flippers."

If your goal is fast sales, then yes, accepting lower revenue (and profit for the flippers) is the cost of unloading the item quickly. That's your choice as a seller, but Gevlon is addressing the value provided by the flippers who "correct" the price.

Remember that Economics is the system of allocating scarce resources, and the desire is to do so most efficiently, i.e., to secure the greatest value to be gained from those resources.

Sub-Prime buyers are sub-prime precisely because they offer less ability to create value out of scarce resources. The greatest value to be had comes from keeping the scarce resources in the hands that will add more value.

"Besides, what market price is, is only an equilibrium at a certain point. If I'm good enough to make a profit with a high g/hour threshold at a lower-than-market price"

Then your ability to add value more efficiently (i.e. by consuming less time doing so), can be used to drive down the market price. Your less efficient competitors drop out of the market, leaving the raw materials to the most efficient provider, you. This is ideal. That is what should be happening.

But that's predicated on the idea that you can supply the market at that lower price consistently. If you can't, and still throw everything up for the lower price despite market signals, then you're simply providing for sub-prime buyers and the market price won't move. Flippers will correct your mistake.

The personal situation you describe is the market adjusting to a more efficient provider. Gevlon is addressing provider of equal or lesser efficiency messing up the market by underpricing. They are not the same situation.

Anonymous said...

In addition to the service you write about, flipping (speculating) also provides the service of increasing incentives of crafting more items to the level which is proper for the market.

If prices are too low because of stupid pricing, the crafters won't create the proper amount of goods. The incentive will obviously increase when all the cheap goods have been bought up, as the prices get higher, and the normal crafters start crafting goods again. Sadly the stupid crafters also start again, beginning another cycle.

The effect of speculation is thus, also, to even out differences in the market price over time. This is maybe the most important service it provides.

As one can see in WoW markets, prices vary a lot despite speculation. Why? I think that the clear source of the problem is the 5 % AH tax. It severely limits speculation to only those cases where the potential profit, with regard to risk, is a fair bit higher than 5 %.

How to solve this, and make price levels more even across the board? The only possible solution I can come up with is to refund the AH tax if you AH the item again after buying it. That would keep the anti-inflation tax while not punishing the speculator for providing the market service.

Anonymous said...

"How many times have you railed against people who call your deep undercutting method “dumb” ?? And now this is how you refer to yourself? I’m confused."

Deep undercutting isn't the same thing as selling an item too low.
Selling something too low comes about because people don't know the market and post too low, when they could have sold it for far more just as easily. Or maybe because they belong to the 'farmed it for free' lot. Or even just because they don't care or whatever.
Deep undercutting on the other hand, when used properly, is part of a longer term strategy to attempt to keep competition low, i.e., its being sold that low for a good reason, not just because the seller doesn't know or care what they're doing.

The Gnome of Zurich said...

Jana: the retarded buyer is not necessarily a moron. It can also be someone who is much richer than necessary to be in your market.

I am often the "retarded" buyer or low level items when it comes to leveling a new profession.

As long as it's cheaper for me to buy it than to farm it (in terms of opportunity cost of making 2kg/hr doing my normal stuff), I'll buy even if it's far, far above the market equilibrium price. If I need a few hundred of something and it is radically overpriced, I will farm it. Unless the market price is so low that I don't notice how high it is.

Gevlon's peacebloom stacks after 3.0, for instance. I'm not interested in farming peacebloom to save 10g a stack, so I'd just pay it, just like all the people who bought from him. Sure, I might have thought ahead of time and bought it up along with Gevlon. But if I hadn't and I wanted to level inscription or alchemy, I'd just buy it.

Now in the market right after 3.0 when everybody was leveling inscription, I wasn't really the retarded buyer, I was the new market buyer.

But if today, I wanted to start a new scribe, and peacebloom happened to be selling for 50s a piece instead of the normal 5-20s ea. Would that stop me? Probably not. Maybe I'd wait it out, or maybe I wouldn't.

Anonymous said...

This is a really good point, it reminds me of a column that John Stossel wrote (got some people really pissed at him) called 'In praise of price gouging'.

Anonymous said...

The error in this post is, that Gevlon values a sub-prime buyers "need" for an item lower than the "need" of a prime buyer.

Anonymous said...

The flipper is not providing a purposeful market service. It is a side effect of adding a new demander to the supply/demand curve.

Basic econ folks: what happens when demand goes up, but supply remains the same? The equilibrium, or market, price goes up.

Anonymous said...

@Anonymous:

You said:"The error in this post is, that Gevlon values a sub-prime buyers "need" for an item lower than the "need" of a prime buyer."

It's not an error. If a prime buyer is willing to pay more for an item, then it makes sense that they should get it. It's more "valuable" to them.

For example: lets take the old trinket Badge of Tenacity from TBC. Badge of Tenacity was a rare item that was amazingly valuable to a feral druid tank, but only mediocre for other tanks. Had somebody listed Badge of Tenacity in the AH for 50 gold, some warrior tank who needed a trinket might have just figured what the heck and bought it, and then replaced it quickly. Whereas, had a market flipper detected the low price, bought it, and relisted it at 500 gold, then a feral druid who really wanted it would have been able to acquire it (and used it throughout TBC end game raids).

Kurt said...

@everyone who doesn't understand that flipping provides a value:

Another method to explain the value that flipping provides: The market with flippers around more closely approximates an AH where you could not only list physical items for sale, but also put up buy orders at a set price that people could fill later with their item. I am frankly surprised that no one has bothered to point this out. That system would reduce flipping substantially, both in the AH and in trade, although of course it would not eliminate it.






@wronganon#1:"The error in this post is, that Gevlon values a sub-prime buyers "need" for an item lower than the "need" of a prime buyer."

No, the subprime buyer values his own need for the item lower, that's why he is subprime and is willing to pay less.

@wronganon#2:"The flipper is not providing a purposeful market service. It is a side effect of adding a new demander to the supply/demand curve."

The flipper is not a "demander". P.s., never use that horrible neologism again.

Anonymous said...

What happened to the previous post? Didn't it have some interesting comments on it?

He's not arguing that it's a charitable thing to do, just that it's not "evil." Apparently something you do isn't evil if it benefits someone other than yourself? Pretty interesting assumption--if you win by doing x, and someone else loses, you're stealing or being immoral; however, if you and someone else wins by you doing x, and someone else loses, you're providing a service.

He's also not arguing that the "need" of the prime is more important than the "need" of the sub-prime.

And I see confusion with "prime" and "rich." If I have 1k gold and I'm willing to pay the full 500g for something I value highly, I'm a prime buyer, but not very rich. If I have 300k gold but don't want the item very much, and will only buy it at a bargain price of 300g or less, that doesn't make me poor. If this was the case for two people after the same item, does it mean you're being "mean" to the poor person (prime buyer who badly needs the item) if you DON'T flip the item before the rich person comes along and buys it for 300g? :P Rich vs poor has nothing to do with prime vs sub-prime.

The Gnome of Zurich said...

@Anon: "The flipper is not providing a purposeful market service. It is a side effect of adding a new demander to the supply/demand curve.

Basic econ folks: what happens when demand goes up, but supply remains the same? The equilibrium, or market, price goes up."

A flipper doesn't change the supply/demand curve. That's why flippers can't make a profit unless they judge the market better than the person they buy from.

A flipper doesn't add to the demand or supply. Demand is goods that are taken off the market and consumed. Supply is goods that are created. A flipper does neither of these things, merely repricing some set of goods. The same quantity of goods is still on the market just at slightly different prices.


Well, the flipper does have a small effect on the demand, -- s/he reduced it slightly. How?

Well, at the lower price, there will be some chance of what Gevlon calls a sub-prime buyer who will consume the good. This is someone who would not consume it at the going market rate, but would consume it at the lower price. But if a flipper buys it and puts it back on the market at a higher price, now only people who value it at the market price will choose to buy and consume it, so the demand will be just a bit less, effectively *lowering* the market price.

This is what people who don't understand economics fail to realize. Putting stock on the AH for below market prices, tends to *raise* the overall market price, as it attracts consumers who wouldn't buy it at the market price.

Flippers, on the other hand, tend to *lower* the overall market price, as they keep these underpriced goods out of the hands of marginal consumers.

So the average buyer will pay *less* than if the flippers did not exist.

That's the econ lesson for the day.

So in fact, the flipper has the

Anonymous said...

"Flipping crafted items is just a silly idea and I have seen a number of people attempting to do that (even off my own goods which is quite funny when they buyout all 4 my items of a type, I post another 4 they buyout, another 4 etc)."

The problem you are overlooking is that in many cases, if you (the crafter) are low balling your items to get the quick sell, can you keep up with the demand? If not, you're simply losing money.

Crafting costs time. Farming mats costs time. Not all mats are plentiful or cheap.

The majority of my "business" is flipping. I watch markets and grab up underpriced items to resell later.

For example, due to severe undercutting, Eternal Belt Buckles dwindle down to under 30g on my server. I grab them up and EASILY sell them later for over 60g. Only thing it cost me was a few minutes of time and some free bag space.

I would call these crafters who post this low idiots - but I won't, cause it's how I make my money. So keep on doing it :)

Anonymous said...

Flipping is stealing only in the way that "property is theft". All you need to do is point out to these people that they really do like their own private property and the ability to dispose of it as they please.

Transactions through the AH are entirely consensual. Once they acknowledge that we are at liberty to spend our money on what we please and to sell the items we own, there's nothing left to their objection.

They might wish that I would sell them titanium ore at half the going rate, but that is not a moral fault of mine.

Bobbins said...

I know this a probably a silly question but it seems people are saying that flippers are NOT included in the original demand curve.
Why are flippers deemed to be an additional to the demand curve and not included in it?
Flippers buy at low price forces price up and then sells forces price down. Why aren't they just another element of demand and supply within the model?

As such won't they just be a tool in order to move the 'unseen hand' to equilibrium?