Rowyn (rowyn) wrote,

Farming the Market: An Economics Lesson from City of Heroes

City of Heroes, like many games of its kind, has a vast array of virtual goods available for players to acquire through gameplay or trade with other players.

As is also common, CoH has two markets for these goods:

1) The PC market, where people sell goods to other people. In some games, the player market receives virtually no support from the developers (don't get me started about EverQuest and the West Commons). In CoH, the devlopers provided an auction house.

2) The NPC market, where players can buy or sell goods to game bots. The NPC market in CoH buys and sells goods at fixed prices regardless of the quantity sold or purchased. Supply and demand have no impact on this market. It's similar to a government-controlled market, except that even governments are usually somewhat responsive to supply and demand. Since the vendors in CoH can make unlimited amounts of both the goods that they sell and the money that they purchase goods with, in CoH there's no effect at all.

In theory, the NPC market should set boundaries on the PC market: the NPC buy price should be the minimum, and the NPC sell price the maximum. (For those goods NPCs do trade in -- some they only buy and do not sell in CoH.)

I've often played games where (largely because the mechanics for the player market were poorly designed) the NPC market was vastly preferred to the PC market: people would rather do business with the NPCs, even if it meant selling at a steep discount, or buying at premium.

CoH is the first game where I've seen the opposite happen: people will buy at a premium and sell at a discount on the player market. Some of this is probably charity, especially since many goods are only purchasable from PCs (though I don't think it's too much to ask someone to pay more than the NPCs would for it, myself). And some people would rather sell to a PC who will use it than to an NPC, from where it will pass into oblivion. But given the scope of the situation and the wide disparity between prices on the two markets, Lut and I suspect most players are motivated more by laziness or ignorance.

Whatever the reaon, whenever you have two markets trading the same goods at different prices, you have the opportunity for arbitrage.

Arbitrage is distinct from the business of merchants or speculators in that arbitrage applies only to near instantaneous buy/sell orders. Merchants have overhead costs: storage, transportation, etc. Speculators rely on prices changing over time. Arbitrage, on the other hand, basically applies only to securities markets, where the goods have no storage costs and can be transfered between owners worldwide instantly.

Atrbitrage is an important financial tool in the real world. Nowadays, it's mostly performed by big businesses with computers comparing the prices across markets and executing trades automatically. Price differentials in real-world markets rarely last long, because lots of people are ready to take advantage of them. This is good for the economy as a whole, because it promotes price stability and fosters confidence in the markets.

Arbitrage in City of Heroes is .... rather different.

First, the price differentials are huge. I frequently buy recipes from the auction house for 500-1200 and resell them to NPCs for 3500-8000. This is, much to my amazement, usually the same recipes. I'm buying ten-thirty recipes a day and (effectively) destroying them. The market only had a few hunderd of these for sale when I started. I keep expecting my own activity to drive the price up, but I've actually watched it fall on a few items. Apparently there's a huge oversupply of the things, and new ones are getting created and fed into the market faster than even I can take them off of it.

There are some imposed limits on my arbitraging, making it not quite true arbitrage. My character has to take the goods from the auction house to the nearest NPC vendor to sell them, which takes a minute or two. There also a limit on the number of items my character can carry, and a different limit on the number stored at the auction house. Interestingly, the storage limit at the auction house applies to bids placed as well as goods stored or for sale. So I can place a total of (I'm not sure) 15 or so bids and/or items for sale and/or items just stored there.

This is significant because it means that any other transactions I do in the market -- speculating, buying goods for my own use, or selling of looted goods -- cuts into my ability to arbitrage. And arbitrage, while generally the behavior most harmful to the market as a whole, is also lucrative and risk-free. There's not even a cost for placing bids, so if my bid doesn't get any takers, I can always cancel it and re-issue.

I should explain how CoH's auction system works, because it's more similar to a securities exchange than a traditional auction. When someone wants to place an item for sale, the seller determines his minimum price, and the auction house charges 5% of that to put the item up for bid. When someone wants to buy an item, they specify the price they'll pay for it, and the auction house takes that amount of money from the bidder and holds it until the purchase is completed or the bidder cancels.

Information available on each item is:

1) the number of bids currently placed for that item.
2) the number of that item currently for sale.
3) the last five sale prices and dates.

Bidders do not see the seller's minimum price, nor do sellers see how much the outstanding bids are for. You can place a bid on an item even if there aren't any currently for sale.

The result is that the market information gives a reasonable idea of supply, demand, and liquidity, and a mediocre idea of price. Some CoH websites do a much better job of tracking price than the game itself will. When I'm arbitraging I look for items with a high supply, low demand, and a 'last five' price list of less than a third the NPC purchase price. I'll usually place my bids a little over the last-five price -- I'm not losing money on these no matter what, and bidding higher means a quicker turnaround. Time is money.

Because arbitraging is easy and reliable, I've been discouraged from speculating, or from selling at auction myself. I've dabbled a little in speculating, when I noticed one usually-popular item was briefly trading at a rock-bottom price. I bought ten and put them back on the market at a 10x markup. A day later, 6 of them had sold. I sold the other 4 on the NPC market (still at a 4x markup over what I'd paid). I did much the same yesterday, and found today that they'd sold for considerably more than my minimum price this time. The way the market works, especially with arbitrage requiring space, I have a strong incentive to turn over quickly anything I opt to do in the auction house.

This means I don't want to buy or sell in illiquid markets. If there are zero bids in a market and the last sale was July, I don't want to bother putting my item up for sale even if the last-five prices are good. Especially with the '5% up front' commission penalty if I decide to pull it, or want to mark it down. (Though I haven't checked -- maybe there's a way to lower the sale price without forking over a whole 'nother commission.) Likewise, I prefer not to bid in markets with no items for sale -- even if it's something I can afford and want to acquire for my own use.

So it's kind of a strange mini-game inside of the regular game. I'm having a surprising amount of fun playing with it, though I imagine when the shiny wears off toying with the market I'll get bored of it and stop. I don't do a whole lot of it -- I'll check once in the morning and once in the evening to pick up and flip orders I've received and place new bids.

Or maybe I'll get bolder and work at deliberate market-manipulation schemes.

I'm actually doing all of this on the Villain side of the game -- "City of Villains". Which seems appropriate, as some of it is rather more villainous and destructive than most of the regular gameplay is.
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