Thursday, January 24, 2013

Business Thursday: how to control the market

Before the post, a quick tip: Audit log containers have a great functionality, they can't be repackaged until the last log entry is 3 weeks old. This is there to protect the log. However we can use it against accidental repackaging. Have you ever repackaged a container, mixing the carefully selected items with others? I did, since then I'm using audit log containers.

Now about the market control. Controlling the market is exactly what you think it is. You decide the running prices, you decide how much profit you want. If you reach market control, you can extort any prices from the hapless people. How can you do it?

You can't.

Whoever you heard of bragging that he controls the market here and there, is either
  • a liar
  • someone who operates in the middle of nowhere and could "extort" a lost newbie or moron once a year
  • who controls production like the Tech cartel did with Tech
  • who controls consumption, for example an alliance leader buying out all the Lokis, relisting 2x higher and then declare that the new doctrine is Lokis and everyone must buy one by tomorrow or kicked
  • a market swing happened on its own and someone claims he did it
The market cannot be controlled. It will always return to equilibrium and those who try to mess with it don't fare well. The reason is simple: price elasticity. No one is forced to buy anything from you now. There are alternative sources, there are alternative items, he can go out to farm himself or simply wait a few more days. There is nothing in the World that forces him to buy your overpriced product. You on the other hand have to constantly buy out undercutting offers, constantly increasing your stock, usually gained on above-normal price. You could still make profit on these if you could sell it at extortionist prices, but you can't.

Traders are slaves of the invisible hand. It is a very generous master who showers the obedient ones with riches. However it slaps the rebellious into poverty. I've yet to see a single successful guy who intentionally messed with the prices (without having control over production or consumption). The "successful" market controllers are usually liars, sometimes just dumb who don't count their own time and celebrate that they could sell a 3x priced stuff after two days of 0.01-ing without sleep.

So, don't try to be smart, don't try to make it to the front page of the EVE news sites, don't try to do anything worth bragging. Just set up decent buy orders, resell the items with a reasonable margin, transport to other hubs if they are under-supplied and money will just pour into your wallet.


Debra Tao said...

"Traders are slaves of the invisible hand. It is a very generous master who showers the obedient ones with riches."

That's cute but so innacurate... After the crisis of 1929 there wasn't any "invisible hand" to regulate the market, like after the 2008 crisis. In the first case stock was going up and down on a daily basis... and the range was like 20% each day. Regulations have been created to regulate that chaotic behavior. But in 2008-2009 the same kind of erratic behavior happened (though on the scale of only 5-6% on a daily basis).

Recent researchs tend to prove that the best mathematical description of the market is a chaotic behavior. There isn't a regulating force. Central banks try to regulate the market though but soemtimes it works, sometime it doesn't.

Bobbins said...

@Dedra Tao
There was no free market in 2008-2009 as governments intervene as the institutions were 'too large' to fail. The invisible hand is that of a free market not one where government were directly intervening in an already regulated markets. The free market would have allow companies and countries to fail as they were using failed business models. What we have now are failed businesses and countries being propped up by governments.

Maxim Preobrazhenskiy said...

@Debra Tao
You are confusing two things.

As long as market is operating properly, there is indeed a tug-o-war between supply and demand which results in "the invisible hand" effect.

In both 1929 and 2008 market itself was not operating properly. We were talking major economic crises where supply and demand sides of the entire world went off the rails.

Using these situations as evidence against "the invisible hand" concept is like saying that breathing is a false concept, because at some point somewhere there was a guy who didn't have enough air.

Hivemind said...

Out in 0.0 and to a lesser extent lowsec, some level of market control is certainly possible. There are usually few players willing to invest the time, effort and ISK to stock trade hubs out there due to the risk of losing ships, while players there are willing to pay a premium for the convenience of not having to go 20+ jumps to reach a trade hub, especially if they don't have the sec status to get into hisec.

You aren't in complete control because if you raise prices far enough then eventually either other players will be motivated to supply the market themselves and undercut you or they will simply go further to find somewhere cheaper to shop, but the relatively high barrier of entry (lots of investment ISK, usually a jump freighter and cyno alts plus the training time to fly it) for competition gives you some leeway.

I know you already mentioned "someone who operates in the middle of nowhere" which is kind of what I'm talking about, but I wanted to emphasise that their market is more than a few lost newbies - more like lowsec pirates and nullsec alliances.

Anonymous said...

Whilst it may be true that you cannot control the market to the degree in which you suggest, it is possible to manipulate portions of the market in your favor using a number of well documented methods.

First a correction - controlling production isn't a requirement to controlling price, controlling supply or demand is. This is why things such as the gallente ice interdiction were so wildly successful - by stockpiling ice at a low price and then by killing off ice miners the goons managed to temporarily inflate the ice price before dumping their product back on the market at the inflated price. Obviously this took the effort of quite a number of pilots, and a powerful propaganda machine (the threat of the interdiction was enough to cause many to dock up), but it did work and there was quite a bit of profit taking on this.

This was very much a supply side manipulation - demand for the product is fairly constant and so by buying up the stock piles on the market then driving the price upwards they were able to achieve a short lived 'control' over this market segment through manipulation.

Other methods of manipulation may be to force speculation of others - this is probably difficult but it is possible to create a run on items...a few well placed forum posts here or there (usually coupled with a dev blog announcement of a change), and the sinking of a few isk to kick start a run on a product and you can achieve a run away price then sell what you bought and sit back and wait for equilibrium to bite people.

This happened a few times recently - one of the most spectacular was the run on cheap minerals generated by the dev blog announcement of the end of drone loot and nerfs to loot drops preventing gun mining. This was always going to cause a correction but at its peak the price was significantly higher than the equilibrium it ultimately settled at.

So in short, you are right in that you cannot control the market, or even a market for a prolonged period of time - you can however control, influence or direct fluctuations in the market and turn a very quick profit from them. I guess this could be deemed "control" but it is more "manipulations".

David Caddock said...

What @Debra Tao is describing is exactly the opposite of a market, and indeed what Gevlon is explaining. The US Government and Federal Reserve were trying to control markets, generally the financial sector but also some production, and it ended in great disaster. The market and the invisible hand use creative destruction to put a stop to wasteful ventures. When the government intervened, they allowed these wasteful ventures to continue, destroying lots and lots of wealth, creating a crisis. They then conveniently blamed it on the free enterprise system in a move to claim even more powers over the market. Without this constant and forceful intervention, they wouldn't be allowed to rack up trillions in public debt, as the market would have made it far too expensive, but now they control the financial markets.

gallego said...

Yep, the aftermath of 1929 and 2008 are actually proof positive of Gevlon's "It is a very generous master who showers the obedient ones with riches. However it slaps the rebellious into poverty." statement.

The invisible hand in a large enough market always greets outside intervention as a crushing fist.

Debra Tao said...

I like how people answer to my data and figures with vague explanation and "nah this doesn't apply here".

Let me first say that if you go to any economic class you will hear a lot of "the invisble hand" mostly to explain why this theory isn't considered good or satisfactory anymore.

In 1929 the market was as "free" as it can be (i will come back to that later) but without regulations it was unstable. For months and months, data is here, check that it's just a fact. So yes authorities choose to implement some new regulations to limit the chaotic behavior of the stock exchange. But guess what ? Every single market in the world has some rules, some rules that you don't even notice as it appears to be extremely natural. Like for instance the fact that one cannot employ children ! There has never been a "free" market only degree of freedom.

What the Fed and the US gov have tried to do was to regulate a market, a system that was going nuts with banks that didn't trust each other... And the classic liberal thesis "let them fail" isn't an option when these companies are key pieces to the financial world. Do you expect a president to remain confident saying that he is responsible for hundreds of millions of people losing their money ? Nothing proves that this would have worked better, just the hope that everything will regulate itself thanks to "adam smith".

soresu said...

In the real world, monopolies and cartels are quite feasible and not particularly uncommon. Trade in illicit goods and services, which is by definition immune to regulatory control, is interesting to examine in this context. There almost always emerge understandings between major players, both locally and on a large scale. Didn't our very own Gevlon write a plea to fellow goblins just the other day, imploring them to avoid mutually destructive behaviour and fleece the prey in peace? Mildly ironic after mocking all those complaints about glyph undercutting...

A monopoly or cartel is not the same as 'total market control', but it comes fairly close when relevant consumption is unavoidable. And it suffices to put the lie to the invisible hand.

A perfectly self-correcting market is as much of a utopia as pure stateless communism. It assumes, for one thing, perfectly rational and educated consumer choices which are about as common as identifying, aspirationally, with a large collective.

Bobbins said...

@Dedra Tao
'like how people answer to my data and figures with vague explanation and "nah this doesn't apply here".'

What data?

Bailing out the banks with tax payer money did lose people alot of money just not the ones who should have. It is basically taxing the poor in order to protect the rich from their loses that have incurred.

Banks which were allow to grow too large to fail, have a proven track record of making immensely idiotic investments, overpaid the rewards for their employees, failed their customers in numerous misselling scandals, recieving bailouts from governments, rigged financial markets etc are still here. No I do not think they operate in an competitive enviroment, do you?

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