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Virtual Economic Theory: How MMOs Really Work

November 16, 2010 Article Start Previous Page 4 of 5 Next

A Superior Market Strategy

Considering again the sell-only market as implemented in most MMOs, players who want to sell an item must compete in the selling market. They must place their item up for sale and wait for a buyer to come and buy it. However, most buyers will sort by price and simply purchase the cheapest item, even if it is only one unit of currency cheaper than the next lowest item.

Final Fantasy XI's auction house even enforces this behavior: the prices of all items are actually hidden from buyers, who must place "bids" to buy an item. If their bid is higher than the lowest priced item, then they buy the lowest priced item for the amount of money they bid. So, if you try to sell an apple for 1000 gil, and I undercut you by selling an apple for 999 gil, when someone comes to the Auction House and enters a bid of 1000 gil, the system sells them my apple for their bid price.

This system of undercutting, especially if there are multiple "market players" willing to continually undercut for a small price difference, makes it very difficult for a casual seller to simply sell an item and get on with the game, unless they are willing to significantly drop the price of the item so that it is not competitive to be bid against.

What frustrates most players is that, when they drop the price significantly, the "market players" will often buy the item and re-list it and make themselves a tidy profit from the seller's frustration!

There are two ways to counter undercutting, the most obvious being to add fees to the use of the market services. If players must pay a fee to list an item, then they pay a small opportunity cost every time they want to shift the price to undercut. Another method is to impose a time limit preventing rapid undercutting. Many games do both of these.

A far more effective method is to include both buy and sell orders, and, by forcing competition at both ends of the spectrum, drive prices as closely as possible to the opportunity cost of the item (ideally, the price range settles at opportunity cost plus or minus the listing fee).

When there are both buy and sell orders, the casual player who wants to make a quick transaction and get on with the game can sell to the highest buyer rather than compete with the lowest seller. In other words, the player can either pay the opportunity cost in time to compete with the lowest seller in the sell order space, or pay zero opportunity cost to accept the highest buy order. If the two prices are close together, then the cost of taking the highest buy instead of competing for the lowest sell is profitable.

Of even greater interest from a game design perspective is that a buy/sell market actually encourages "market players" to play their game (in my opinion, it's always good to encourage players to have fun playing the game in the way they want to play it, provided that such behavior is not detrimental to the experience of other players, as happy players are subscription-paying players.)

In a bi-transactional market, players can place both buy orders and sell orders for the very same items: buying them and re-listing them for a profit. The behavior that seemed detrimental in a sell-only market now serves a valuable service: these market players act as brokers that provide instant (zero opportunity cost) transactions to players who aren't interested in spending time and effort on the marketplace.

If there is sufficient competition among market players to keep the cost differences between buying and selling low, then players who take their buy orders or sell orders pay a relatively small "fee" in exchange for an instant market transaction.

Furthermore, if fees are only charged for the listing of orders, the "market players" suffer all the fees charged by the market system and order-takers pay or get paid only the price of the item.

The market-takers feel like they're getting a good deal because the market isn't nickel-and-diming them, whereas the market players feel like they're getting free money for doing nothing when, in fact, they're putting their resources forward to ensure rapid market transactions, absorbing excess supply of market goods, and spending their time (opportunity cost!) to make all this happen. It's a win-win.

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