MMO economies are fascinating to the armchair economist in me. Every high school graduate in the U.S. should at least be passingly familiar with the law of supply and demand. However in the real world where markets are often slanted thanks to government policies it is hard to see this simple concept work its effect.
MMOs, on the other hand, are a fertile playground for basic economic theory because the meddling of the government, IE, the developer, is relatively minor in comparison to the real world markets. Often they set a simple, static, tax rate as a money sink, provide a bare minimum value for products via vendor purchase prices and enact no further policies based on social or political pressures. Some MMO economies are quite robust, for example that of EvE Online. Others are quite broken in that the in-game currency rarely holds its value. Most are in the middle where the currency slowly devalues between expansions but gets a boost when an expansion comes out.
I often joke that the World of Warcraft economy is much like a strip from Order of the Stick where shopkeepers are selling their products at a loss. In the WoW auction house it is not uncommon to find that the materials required to create a refined product are often sold for more than the refined product. This runs counter to what we know in the real world where manufacturing normally adds value to products, not subtracts value. However, this is an excellent example of of supply and demand in action.
In WoW a miner mines ore. This ore can either be sold to jewlcrafters who prospect it to obtain gems or it can be smelted down into bars. Once smelted down into bars those bars can either be mixed with bars of other metals to create bars of alloys or it can be used by a blacksmith to create a final good such as a piece of armor, weapons, and so on. The gems the jewlecrafter gets can be cut into one of several gems which provide stat increases to appropriately slotted armor. The cheap ASCII art flowchart of this process goes something like this:
Ore -> Bars -> Armor/Weapons
Ore -> Bars -> Alloys -> Armor/Weapons
Ore -> Gems -> Cut Gems
Now, why this runs counter to the real world rule of manufacturing adding value yet uphold the law of supply and demand lies in the fact that manufacturing in WoW takes no skill on the part of the player, is relatively simple to train, and takes, at most, 30 seconds to go from one tier to the next. So from Ore to Bars, for example, might take 10 seconds. From Bars to Armor might take 30 seconds. Realistically there is no cost to refine and manufacture goods.
Ore can be used in both bars and prospected into gems. That means ore can be sold to both miners and jewelcrafters. Once smelted into bars jewelcrafters no longer can prospect it for gems nor can the item be broken back out into ore.
However, the normal ore to bars conversion is 1:1. IE, 1 ore smelts to 1 bar. presuming 500 blacksmiths (who are often miners themselves) and 500 jewelcrafters (who are also often miners themselves) by smelting the bars the player has reduced his potential marker from 1000 people down to 500.
The same holds true for the next step as well. Bars can be forged into armor or weapons. Each armor or weapon has its own stats which are good for one, maybe two, classes. So if a Paladin is looking for plate armor and a Warrior is looking for plate armor they would be looking for two different set of stats. This is presuming, of course, they are looking at the same piece.
WoW has 8 armor slots, 9 or so different weapons for which items can be crafted. Furthermore with 9 different classes, 3 of which plate wearing, there are literally hundreds of different combinations of armor, weapons and the classes seeking them. Making a piece of armor or a weapon out of those bars locks the item into being sold to that particular class looking for that particular piece of armor or particular weapon at that moment.
Using the above example of 500 blacksmiths as the market for bars it might be all of 5 people on the entire server that would want the finished good at any given time. Probably less. The bars to finished good conversion rate isn’t 1:1 but it isn’t extremely high, either. 6 bars to one piece is not uncommon. 10:1, 12:1 are about as high as it goes. It isn’t too hard to crank out several items at once this often exceeding the demand on the server at any given time.
So supply rarely really decreases but demand declines dramatically. When we look at the law of supply and demand this would mean that the relative price of each item further along the manufacturing process would fetch a lower price. Which is exactly what we see on the most common of manufactured items.
There are exceptions, of course. But those exceptions also follow the same law. What I described above was for the relatively common items one would create. The manufactured items which fetch a higher price than the constituent parts sold separately do so because they are quite rare. Often they require a pattern that drops less than 1% of the time from specific mobs and only for people who are able to use the pattern. They, in turn, require above average number of common materials as well as some uncommon and rare materials which themselves have low drop rates. Because of the rarity of the pattern and the rarity of the materials needed to create the item it is quite difficult for a single producer to make a single item much less several. Since they aren’t meeting demand they can ask for, and often get, their cost in materials plus a sizable markup.
However, the morale of this rather long article? If you’re playing an MMO it is often better to sell the raw materials and purchase the finished goods than to produce the finished goods. If you’re a producer of goods in a guild and people are asking you to make an item and they have the mats, check the prices on the auction house(s) and if the raw materials are selling for higher than the finished good, direct them to sell the mats, buy the finished product and pocket the extra currency. Of, if they insist they want you to make it and you’re a sneaky bastich like I am; buy the good, get their mats, “produce” the good for them then sell the mats to keep the profit for yourself. I’m a firm believer that stupidity should cost. 😉