Playing the Auction House
by Joseph Rowlands

I played World of Warcraft a few years back. One of the most interesting features of the game is an auction house they created. Players can put stuff that they find throughout the game up for sale. Other players can search for items, place bids on them, or buy them outright. Items can be placed for sale for 24 to 48 hours. You have to pay to put something up for sale, and the longer you keep the auction going, the more you have to pay.

In some ways this is a straightforward mechanism. You can sell you loot to others, and by using an automated system, others can see what's for sale and purchase it without your needing to be there. The fact that bidding is possible allows you to get the highest price you can but allowing you to sell at a lower rate in case there isn't enough demand.

What many people have figured out is that the auction house is an excellent way of making money in game. If you buy some products for a low price, you can resell them at a much higher price and make a profit. And you can make a lot of money that way, allowing you to afford better equipment, spells, or whatever else you want or need.

To make money on the auction house, you have to study the market. If a commodity is selling at one price, you have to know whether it is selling at too high or too low of a price. You need to know how robust the demand is. If you buy at a low price, will you be able to sell it? If you can't sell it within the 24 hour window, you will be charged a fee for placing it for sale. The fee can be very large for some items, and it might be negligible for others. So some products work better for buying and selling, as they have less risk. The price range of the items also matter. You may be making a profit with cheap goods, but the total revenue is small and supply is limited. More expensive items can better utilized your money.

While talking to a friend who plays the game, he mentioned that he also plays the auction house. And we briefly discussed the question of the morality of the business. Since you don't actually produce anything, nor do you act as the middleman in setting up the transactions, what value are you adding? Playing the auction house is simply a form of speculation. If you believe that a product is undervalued, you can purchase it and sell it at a higher value at some later point. There's no easy way to speculate the other direction, when prices are too high, but that doesn't change the nature of it.

His belief was that playing the auction house was a kind of immoral activity. In his view, it is parasitic. He adds nothing of value, and simply makes the end customer pay more. If he and other speculators had not purchased it at the lower rate, the end customers would have saved money. It is zero sum. Every gold coin he gets is a gold coin someone else is losing. But since it's just a game, playing the auction house is excusable.

I have a very different take on the subject. I think there are a number of things his argument overlooks or gets wrong in the details. The speculator is providing value.

The first thing to note is that when you buy items at a lower price and resell at a higher price, it actually changes who the end customer is going to be. If a commodity is priced very low, people with very little money or people who have money but don't need the commodity very much will be potential buyers. When the price is shifted upwards, it reduces the number of buyers. You'll be left with people who have more money or who need the item enough that they are willing to spend more of what they have.

This is the first service that's provided by this kind of speculation. The customers who are buying it at a higher price don't have the option to buy at a lower price. If the price was lowered, there would not be enough supply for everyone. It would be pure luck whether you happened to log on and check the price of the commodity before anyone else got a chance to. So the speculators do a service for the end customers. They are willing to spend more money on it, and the speculator allows a supply to be available at that time.

Even though there is a service provided, the customers may not see it that way. They might think that if the speculator didn't exist, they would just get the product at a lower price. They might not realize that at the lower price, supply and demand don't intersect and there would be a constant shortage. And in fact, this is the case before the speculator gets started. He find that a product is easily and quickly sold, and there is a constant shortage of it. By increasing the price, he reserved the limited supply to those who are willing to pay the higher price.

There is a second service provided by the speculator. And this service is to new suppliers. If you are running around finding loot, you might not have any idea of what the proper price for it is. But the speculator learns the market in detail, and find a price that guarantees a ready supply but also allows it to be sold over time. Since the speculator's prices are seen by all, new or infrequent suppliers will have a better idea of what the market will bear. They can get more money for their sales, and lose less because they priced too highly.

These effects of speculation do provide value to both customers and suppliers, but it isn't a uniform value. Some customers will lose when the price is adjusted upwards. These are the customers that would only buy at a lower price. The speculators ruin their chance at getting lucky.

Similarly, some suppliers could benefit from too low of prices. If people sell all of their limited supply for cheap, some suppliers can come in and sell for a much higher price that only the wealthiest of players can afford. Since that market has a constant shortage of goods, the wealthier clients may have to pay the higher price or go without. So even here, the speculator has a negative effect on some suppliers, while benefiting others.

There is another service that the speculator may provide. He may buy at times where the supply is higher than usual, hold onto the commodities, and resell later when the supply drops. This evens out the supply and evens out the prices over time. And the same works for big changes in demand. The speculator creates more price stability over time.

That again has two groups that benefit. Suppliers benefit when supply is high because the speculator will buy their goods, pushing up the prices by some amount. And when the speculator sells, he the customers will get a lower price and better availability than they otherwise would have.

Instead of being parasitic, speculation is another way of adding value. By studying and understanding the market, he makes it easier to match buyers with sellers over time, and improves price stability. Playing the auction house is a legitimate and moral way of gaining money in the game.

Speculation in the outside world is different in one important respect. It is even more valuable. In the game, the wealth of the customers has no relationship to the value they contribute to others. There is little in terms of production, as the economy is based on killing and looting, and regenerated monsters to kill and loot again. If a rich person and a poor person both want a commodity, there's no efficiency difference from one winning over another.

In the real world, commodities are often used for further production. Those businesses that can more profitably utilize a commodity are more able to bid the price up and compete with more marginal users. If you can use some materials to make a product with a high profit, and I can use the same materials for a lower profit product, there is an overall value increase from your being able to purchase the commodities instead of me. The higher profit indicates that customers want that product more. If supply is limited, your products are more valuable than mine, at least at the current prices and production amount. Perhaps as I sell less of my product, the profit will go up.

This means in the real world, speculation has an additional benefit. It allows supply to go to the most profitable uses. It does this by increasing prices to avoid shortages in the present, or by increasing prices now so that they can be lowered later. This prevents non-optimal companies from buying the supply while the price is low now, which would leave too little supply later for the more profitable businesses.

This positive effect does not exist in the game because the customers are not generally not producers. There's no way for a commodity to go to its most profitable use if it isn't used for production. In the real world, a resource can be used in many different ways, and a market price can help indicate which of these different uses is more efficient in terms of customer satisfaction. But if there is no competing uses, and in fact there is no production, then the game world doesn't not share this additional value.

Nonetheless, we can see that the speculator is a provider of value. He benefits consumers and suppliers, and makes the market more efficient over time by evening out prices and providing price information to inexpert market participants. Far from being parasitic, the speculator is a provider of value.

Unfortunately, people often only focus on the seen effects instead of the unseen. They see that the speculator is increasing the prices at one point, and often don't see it when he lowers the price at another point. They blame him for increasing the prices, while ignoring the fact that he also makes sure the supply is available. They imagine a world where every detail is exactly the same in terms of availability, just with a lower price. They focus only on the current price increase and don't focus on a later price decrease, price stability, and continued availability.

And as we can see, sometimes even the speculators are unable to see the values that they add.

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