The Auction House

Alternate title: Why is the WoW economy not like real life?

The broad answers lie in survival and advancement. Your character will not die, starve, or go homeless due to poor economic decisions or even by totally withdrawing from the market. To improve the quality of life for your character, he needs not interact with other players for crafting or through the AH. Alts allow you to sidestep all of this; though arguably they are a sort of managed economy. In my case if that were true then my main is clearly an autocratic leech, stealing the production of my alts. My JC words hard, making thousands and thousands of gold, and yet she does not even have epic flying despite my main riding around on mounts that cost three times as much.

But let's go deeper. Let's look at the WoW economy specifically. Let's see how the mechanics and structures of the game influence the economy. I'll focus on the auction house and how its fees change how the economy works, or arguably doesn't depending on what you're measuring.

Before we start, no matter what regulations, restrictions, taxes, bribes, crashes, booms, wars, or anything else that happens, none of them can escape the market, for people will always be trying to make themselves richer with the least work necessary. That's not lazy, that's efficiency. And before you start arguing about charity, don't restrict definitions of wealth to mere cash and material goods; people make markets with their own currencies for everything from cars to to love.

Auction House
It is the auction house that makes everything interesting in the economy.

In terms of destroying gold, the AH does it by two means. The first is deposits which are returned on successful auctions and act to punish failed and canceled auctions. The second is the cut taken by the auction house. This means that for the same profit, players would need to charge more than in direct trades. Think of it as the income tax, which can be avoided by using the black market. Yea, trading with other players is the black market of WoW. :) What are the effects of these two methods of destroying gold?

Deposits
The deposit encourages players to ensure that their auctions sell. This means making their product more desirable to buyers. The obvious method is to make a better product, but since crafters are effectively clones, this won't help much. The feature list for Titansteel Destroyer is the same no matter the crafter. There's no option for embedded graphics or a larger hard drive.

Sellers must use other methods. The simple one is to charge less. We call this undercutting. If you'd lose a 5g deposit, it's worth losing 1g profit to ensure the sale. Get a few dozen people doing this and you'll see buyouts drop by half over the spread of all the auctions. Each person acts in rational self-interest to avoid the 5g loss, but the total loss of price often ends up being much more. Two personal factors play into the undercutting as well. Impatience can cause players to trade half their profit just to ensure that the auction sells quickly.

Ignorance is likely the larger cause. Imagine if you knew that the market would take 500 stacks of saronite per day. You see 100 up. It is likely that you could charge more than the average price and still sell. But in all likelihood you don't know what the market can take per day or how much it has already, so you play it safe and undercut. On a smaller market you can judge these things, but good luck fully understanding the behavior of hundreds of people with wildly different profit margins.

However with no deposit to lose, players would be less eager to undercut. They'd charge a bit more and see if that sells, knowing that it's worth it to try 50s higher when they're not going to lose anything by a failed auction (except a bit of time, but let's remove impatience to simplify things).

AH deposits encourage market crashes as uncertainty and fear of loss drives prices rapidly downward.

The other way to sell better is to sell in a way that the customer wants. When the cooking daily is for 4 northern stews, no one wants 3 chilled meat. They don't want 5 either. Or 20. They want 4. Not just that, they might pay a higher cost per unit for 4 than 20 because to them the extra 16 is wasted anyway. The same applies can apply to dusts or other goods which are used in specific quantities. Careful stack creation can yield greater profits. In this way it's actually a lot like real life, the equivalent of the single tube of toothpaste at the checkout which is much more expensive than buying a four-pack in the aisle you were just at, but you're in a rush and don't want your teeth falling out.

The inverse comes from making larger stacks. Sometimes people want a lot of something. They want 400 dust. They could get it for 2.5g each, one at a time, or they could pay 2.55g each and get stacks of 20. 400 clicks or 20 clicks for 20g more, not to mention making it so much easier to keep track of. There are mods that can overcome this, but they're not so common as to defeat the value of high stacking.

Dusts have no deposit, so they're not as vulnerable to crashes. This doesn't mean they're immune: recently on my server dust prices crashed. This is an inverse speculative process: people think prices are going down so they try to jump ahead and get something before the price goes down further, but it is exactly that which drives prices even further down until people are tripping over themselves practically giving away dust. Since I have some spare gold, I might buy some up in anticipation of the new raid and arena season when demand is sure to go up. Why? Because I'm the kind of nice guy who hates to see people end up with no dust for enchants, and who believes no good deed should go unrewarded.

Cuts
After you sell, the auction house takes a piece of it. At first glance this wouldn't appear to affect all that much. Just a gold sink, right?

The cuts have a big effect on crafting and flipping.

Let's start with crafting. I see that I can sell a cut gem for 175g. Low, but that can still be profitable. The narrow margin may act as an incentive for buyers, so I might end up with more profit on many gems than I'd get only only a small number at a higher price. There are raw gems up for 170g. Ouch. A mere 5g profit, but volume should make up for that. Let's ignore the risk of spending 170g for a 5g profit, that was yesterday's topic. Instead consider that a 5% AH cut means that you only get 166.25g for the cut gem. This means that there much be a higher gap between raw materials and crafted products than would be expected just by the crafter's time. He could get around the cut by selling in trade, but that requires him to be online to make the sale and possibly to have to travel to another city. The 5% loss is more than worth the time flexibility and saved travel.

Ah cuts discourage slow prices in prices from flipping. The mechanism is the same as with crafting: you're going to have to charge 5.26% more just to overcome the AH cut. Add in the risk of losing a deposit by charging more and it's easy to see that if someone is going to flip, their going to flip when items are far below market price rather than just a few percent. Instead you'll see crafters buying cheap materials for crafting later or rarely buying to resell in trade channel; 15g ore with a 17g market rate: "WTS ore 16g, cheaper than AH!"


In conclusion...
There are actually real life equivalents to these: shelf costs, employee costs, taxes and the like. However they are much less apparent to the average consumer than the AH costs are. Why? Well odds are you've sold something on the AH so you've experienced these costs first-hand, changing how you sell.

Have you seen similar trends of crashing prices as supplies flood and sellers panic, only to be reset the next day or week when the auctions expire? Then everyone forgets what they did last night but wonder where all their gold went. Meanwhile I'm scrolling up through chat demanding that my mods tell me where all this gold came from. Don't get me wrong, I'm hardly rich. I don't care enough to gather gold purely to gather gold, but I have found some fun in finding a fundamental truth: People desperately want to give you gold, all you have to do is figure out how they want to give it to you. It might be chilled meat, cut gems, armor vellum, or even the lowly copper ore which lowbies don't know what to do with and level 80, skill 1 BS don't know what to do without.