Tuesday, December 23, 2008

Deflation?

Tobold, The WoW Economist, and Greedy Goblin have noted that there appears to be some deflation going on in Auction House prices at the moment. Each of them attributes it to a different cause. The WoW Economist says it's because of a temporary decrease in demand because most people are levelling. Tobold feels it's a permanent decrease in demand because of the lowered difficulty of WotLK PvE. I don't really understand Greedy Goblin's explanation, but I think he's blaming it on the rich people gouging the poor people (Marx-style class warfare?).

I'll offer a different explanation: Right now, the market in WoW is not obeying supply-and-demand in the classic sense, but is being dominated by the mechanics and side-effects of levelling professions.

Here are my assumptions:

1. Most people are gatherer/crafter. They have one crafting profession and the related gathering profession. There are some double gatherers or double crafters, but they are outweighed by the gatherer/crafters.

2. Most crafters have a personal stockpile of raw materials. They primarily craft using materials from that stockpile and only purchase materials if they are missing them.

What I think is happening is that most raw materials being gathered never enter the market. Instead they are stockpiled to fuel the crafting required to level the profession. Only after the crafter hits 450 skill, will excess raw materials be redirected to the market.

So on the raw materials side, what we've seen is an artificial scarcity of materials, as most materials were being reserved for levelling. Now, a month after the expansion launched, more and more people are hitting 450 skill, and excess materials are starting to be sold off for profit, decreasing the price.

On the crafted materials side, the fastest crafters were the only ones able create the higher level items, and thus could command a premium for their items. Now, more and more crafters are reaching the higher skill level and producing the high level items. The big change here is that the crafters don't care if they are selling the item for a loss. They are crafting for skill points, not monetary gain. Any money gained from selling the item is a bonus. Supply is independent of demand at this point. Even if all the tanks have Tempered Saronite, it will still be made, because it nets the blacksmith a skill point. So a serious excess of supply is being produced, again driving down the price.

The key here is that the crafters are not being driven by traditional monetary incentives, they are being driven by the desire to increase their skill. That warps the market. I think this state will probably last for the next month or two, until a great majority of the crafters have reached 450 skill. Then levelling skill ceases to be a concern, and the traditional economic concerns of profit and supply-and-demand will reassert themselves, and we will see prices stabilize.

8 comments:

Cuthbert said...

Most of the stuff put up by crafters is always sold as a loss and is usually sold just to level. There are usually ever justa few items from most professions that can be sold for a profit.

You make a very interesting point about the stockpiles of raw materials. I never really thought about that in my analysis. I would imagine even after 450 many crafters keep excess mats for use later.

Thanks for plugging the site. I play a pally too. I was holy in BC. I'm leveling ret now in Northrend and I'll probably go back to holy at 80.

Green Armadillo said...

I guess the interesting question is WHERE the market will stabilize at. We're postulating that:

1. Supply of materials will be up because players will not need to level, and will therefore dump their excess materials on the AH. (Prices go down? ... unless players also scale back harvesting efforts....)
2. Demand for materials will be down because players will not need supplemental materials to level. (Prices go down?)
3. Supply of finished crafted products will go down because players are not dumping skill-up items. (Prices for finished products on the AH go up, while prices that a crafter can command as a commission would go down because more crafters will be able to do each recipe.)
4. Demand for finished crafted products will go down as players hit max level and get all level 80 crafted stuff they want. (Prices for finished products go down, unless the price gets low enough that crafters stop trying to sell finished products, allowing the price to go back up.)
5. A new content patch will be out at some point, possibly with new crafting recipes and/or harder raid content that drives further demand for gear. I don't think Tobold is entirely wrong on that one - I'm certainly not touching high end gems/enchants until I've got gear that I will keep for more than a week. (Could go either way.)

Bottom line? I guess we don't know any more than The Fed does.

Anonymous said...

Good morning (and merry Christmas, if you celebrate that sort of thing)

I think supply and demand is still in effect - its just that right now supply is really high (as you mentioned, people dumping crafted items) while demand hasn't risen to match the supply.

With regards to what will happen in the future, we haven't seen a lot of world drop recipes (meaning if you have the time and inclination, you can get all the recipes right now without relying on luck). Once those recipes start appearing, I suspect we'll see the economic prices to start rising - as it stands, anything that is actually rare (and desired) is actually commanding a very high price, at least on my server.

Also, there is severe inflation in the professions that demand massive consumption - I'm thinking of enhanting here - as the patterns require an enormous amount of raw materials to level.

Anyways, enjoy the site, keep up the good work!

Karl said...

The other thing to track is the range where the bulk of the players are at. Once they hit 80, and progress beyond heroics, I suspect that we will see an increase in prices again, as there will be less people farming.

We have yet to see what the true value items will be for gatherers. It's just too soon. What will be the new thick clefthoof and primal air?

The other thing that is changing is that the progression to 80 was faster than the one to 70. So that changed the dynamics as well. Also the fact that Naxx is easier (or we are better prepared) so guilds are already farming that content, and then effects crafters. Also the changes to crafted patterns..

So many changes, so it's hard to say where it will balance out.

Macawber said...

Sorry to be nit-picky, but both this blog and all the ones you linked to seemed to have gotten the definition of deflation wrong. It's not just falling prices. Deflation is a contraction of the supply of money compared with the real growth of the economy. One result of this is that prices tend to decrease, and the value of each unit of currency increases.

If the prices for things like leather, ore, and so on have decreased in WoW recently, the reason seems obvious to me. There are more high-level gatherers around, so the supply has gone up. The demand may have decreased a little too, since there are fewer people rushing to level up their professions before everyone else. Neither of these has anything to do with deflation, which is always a monetary phenomenon.

Jong said...

I like Tobold's and your assessments.

Unfortunately for me, products I supply (gems) has been deflated badly, and the products I consume (flasks, abyss crystal) has gone through the roof.

pugnaciouspriest said...

My main doesnt have a gathering profession ) unless u count cloth but my crafting Mat requirements for tailoring are more cost effective if I farm them. For a while I made my money from selling my Imbued frostweave to other tailorers looking to level, The Gems for some items are cheap, and the elemental components are easy to farm - i am certainly selling more then i'm buying - but the items Im crafting for leveling are being sold for less then what the going rate for the mats are going for..

ellifain said...

As a pure gatherer (herber/miner) ive noticed a few things on my Realm (Oceanic - Khaz'Goroth - Alliance).

When i first started putting alot of raw mats to the AH the prices for many things were stable and about equal: 40-50g for stacks of cobalt, saronite and many of the LK herbs.

since then saronite has gone through the floor (down to 20g at peak times), cobalt actualy went up to 50-60g and the herbs have stayed quite steady.

I imagine herbs are holding their price due to inscription.
Cobalt is harder to get than saronite, which is amazingly easy to farm in sholazar.