Tobold's Blog
Wednesday, April 22, 2009
Too much speculation

Warcraft Econ posted WoW economy observations of the first week of patch 3.1, in an attempt to explain why the predictions of every single WoW economy blog on items which would go up in price were dead wrong. The only item which did make money on many servers was glyphs, and even with these there were some servers (including mine) where glyph prices went down instead of up with the patch.

Basically the advice that you can make a lot of money from a patch, by looking at what crafting materials are needed more after the patch, and buying them cheap before the patch hits, is self-defeating. Yes, demand for something might go up by 10% after the patch. But if enough people stockpile it, you end up with supply still outstripping demand, and prices falling. Especially if the demand is only going up slowly, because it is based on rare drop recipes from a new raid dungeon.

So across the board on my server I mainly observed another big step in deflation, with most crafting materials now costing less than before the patch. Maybe the predictions that people would need more of certain things for Ulduar or for the new crafting recipes was right, but with too many people speculating on these predictions, the expected price increases never happened. And of course all the epics you can craft now look less good compared to Ulduar loot than when they were still compared to Naxxramas loot. Buying somebody a bunch of epic gear has never been as cheap as today, compared with income from daily quests etc.
I was not all dead wrong. I'll post tomorrow what was the one item that gives 100% profit. Granted, I lost on the other 10-20%. But luckily I invested into the one winner the most money.
No need to wait until tomorrow: The one item that gives 100% profit is flasks made by alchemy, because they still trade at around the same price as before, but have been doubled in number (and halved in effect). That is more an effect of auctioneer and people's memories for prices thinking a flask "should" cost a certain amount of gold, plus a secondary effect of lots of herbs having been used for the short burst in glyph making activity. That just delays the inevitable, flask prices will come down soon.
I only stockpiled glyphs, lucky me ;)
Those who stand to make the most money post-patch are those who are able to get the recipe/pattern/plan drops from Ulduar and the associated runed orbs. The first players to craft these items can basically set their own price since the craftables are on par with 25-man loot. It'll be the only way a lot of players will ever see Ilevel 226 gear. Even the runed orbs are selling for 2500+G a pop on my server.
With every patch, WoW blogs predict what's going to go up and down in price, and they're almost always wrong.

It may be that the predictions are influencing the market, but I doubt this. While there are a lot of hardcore business people in WoW who read these blogs and do their own analysis, they represent only a small fraction of the overall WoW economy, and shouldn't have so strong an influence.

I suspect it's more fundamental. All pre-patch analysis assumes that the principles of the real world economy, as found in economic textbooks, applies to the in game economy. Considering the track record, it seems that this has been proven to be false. What we need instead is proper economic analysis of the WoW economy as it IS, not how it should be.

We have the data, we just need to first forget everything we learned in class.
I too stockpiled some items (Arctic Furs, Icy Dragonscale) but I am being patient. There will always be casual players that want crafted epics and can't raid for better items. The problem is with a lot of these requiring patters, runed orbs, etc it will be awhile before prices start to move. Look at the glyph books. In what little time 3.1 has been out, this green random drop has gone from 3k to 1k on my server. Why? because there is a balance of supply and demand. The problem with the new crafted epics is the buyers don't have endless sums of gold so it will take a while for their price point and the sellers price point to match.

If you had to rent each backpack slot on a monthly basis you would see the WoW economy performing more in line with supply and demand. As it is, for any given item there's thousands of people who have a ton of them in the bank just in case it ever becomes useful. This moderates the price or even drops it because when the item suddenly becomes in demand, the stockpilers release the supply to their friends for free or for the "fair" price of whatever it was prior to the patch. (Or something like that). Or the guild bank has a gazillion of them. There's a limited quantity of storage an account gets for free (one full bank vault per lvl 1 toon), for a one time cost (extra bags), and an essentially infinite amount if you are willing to play mail tag with yourself. There's virtually no pressure to liquidate inventory, so a low demand item just slowly piles up a massive inventory. If demand spikes, that inventory just goes down. Items that people just don't farm for any more (motes of fire, wisps of air)--- those are the ones that will end up costing a lot per unit in a sustained way. During the middle of the BC era, clearing Stratholme would net you around 400g on average, because the large brillant shard and righteous orb supply had been depleted and so they brought very decent prices. In my personal case, I had around 300 fire protection pots sitting on an alt for 18 months because I didn't care to do anything with them. If I'd been paying 10/g month to store them, they would have been gone a month after BC came out.

If people had to pay a significant amount of ongoing monthly expenses to store items, people would be much less eager to be packrats.

That's part of my theory of woweconomics.
The assumption text book economics dont apply is dead wrong. There were countless posts on other blogs already why the assumptions were wrong. For example, with the patch a lot of people may have picked up the game again that were bored by Naxx and S5, plus a lot may have started to clear out their banks to be ready gold wise for enchants etc. The often mindless undercutting wars in steps of 10-15% dont look like people are liquidating investements, but rather stockpiled stuff.

Also note that only the patch was applied, season 6 didnt start on the same day and nobody has ulduar on farm just yet. People generally buy stuff when they need it, not in anticipation of some great drops in a few weeks.

Textbook economics still applies like a charm, there is no sign of the contrary. At the moment we see a shift in the supply curve, and reasons is up to interpretation. It may lead to a new equilibrium, but its much more likely that prices will return to more or less normal in a couple of days/weeks. I for one am investing. A lot.
I've got 20 stacks of Icy Dragonscale hoping they go at least up to a price that I wont LOSE money on.
Did you see my post yet?
When people apply simple textbook economics to WoW to predict if prices will go up or down after a patch, they are about as successful as chance. This may mean that textbook economics don't apply to WoW, or it may mean that they're being applied incorrectly.

In either case, I'd say that the analysis needs an overhaul. As I said in the earlier post, we have a massive amount of data at our fingertips. I think we should question our assumptions, dive into the numbers, and see what we come out with. No matter how thoughtful or sophisticated, any predictive model is only as good as its predictions. And so far, our models are pretty lousy.
This speculation phenomena that happens around patches has been around for a bit. I actually make a TON of gold off the whole thing. The trick is to realize that people are going to be stockpiling prior to the patch with the expectation that prices will go up.

With this little bit of extra knowledge, you can go ahead and start a stockpile prior to the patch and then begin dumping them immediately BEFORE the patch hits. The reason is that prices start to climb in expectation of the patch. By choosing that time to sell, you make can make a bit of gold on the "late" speculators.

Then when patch day happens -- resist the urge to list your stuff just wait for the market to crash. This is an important step because it WILL crash as everyone who stockpiled tries to make a quick buck. Your profit, however, lies in the longer term.

Instead, your best bet is to stand pat and wait a few weeks until prices stabilize. Whatever market change occurred in the patch that you were speculating on still occurred -- it's just that the market needs to get rid of all the excess stockpiling before the new market price emerges.

If you are aggressive and have a lot of excess gold (like I do) then the best play at this point is to actually BUY as people crash the market in a panic. This serves two purposes -- 1) it stabilizes the market as you collect the excess and 2) it adds to your own stockpile at low prices. At the very least, you can just buy up what you sold off the day before the patch as prices were rising.
The Ulduar patterns seem to be pretty rare, too. Comparing notes with a workmate who plays on another server, between 10 man and 25 man, our combined guilds have downed 30+ bosses, with not a single pattern drop. Much rarer than they were in tier 5, say, where you'd see them dropping off trash quite frequently. I've seen a couple of people in Trade offering to craft new patterns, but only a couple.
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