WoW Econ 102 by Sovrun
(Zekta: Yeah, I am still alive, just haven’t much time and topics to post. Thanks Sovrun for these wonderful posts. Until next time o7 Zekta.)
WoW Econ 102: What can Hunters tell us about pricing?
There comes a time in everyone’s life where they come to realize that what appear to be one thing is actually another. This is what happened to me a while back when examining the WoW economy. You can talk about a number of economic factors that could be involved, but in actuality none of them matter. The WoW Economy isn’t in fact an economy at all.
Whoa, not so far there partner, shouldn’t you qualify your statements a bit before jumping off the deep end. In last post, we talked about markets. Aren’t markets naturally associated with the economies that exchange products for a monetary value from the buyers and sellers? May be we didn’t spend enough time talking about “nuts”.
Well, if we don’t assume the typical, then what do we get. Hmmm, what is it? But of course… WoW is a game. The economy isn’t something that functions like a stock exchange or store. The WoW markets are each a game within the confines of the game world. They put sellers against each other in to be the selected item that gets purchased. In a store or stock exchange there is no order to the items that will be sold. However, within the game, only the lowest priced items that meet the request are purchased. This order changes your approach to pricing and figuring out which segments of the markets to participate in. Get it?
Auction House is a game
Once you accept that the Auction House is a game, you change you mindset. Let’s look into game theory to determine which of our actions will be most beneficial. I would like to examine a classic example of the Hunter’s Dilemma. This is an example where two hunters can independent select from two different meadows to hunt in. The Northern Meadow is filled with larger game, such as, deer and the Southern Meadow is filled with smaller game, such as, rabbits. The dilemma revolves around the choice that each hunter must make. The hunters will get capture either one deer or three rabbit from the respective meadow. However, if they hunt in the same meadow, they go home empty handed.
This example isn’t purely accurate, but explains how your choice of segment affects the price that you can get. The WoW Economy actually has many hunters working in each meadow, but WoW has a lot more game too. The Hunter’s dilemma points us to markets with less competition to achieve the best possible price for our goods. This doesn’t mean that hunting in the Western Meadow will be success simply because no one is hunting there. There might simply be no game or demand for those items. Simply put, find segments with demand, but limited competition. This is also why the profitable AH Gamer will need to have some diversity in production capabilities.
Wait, isn’t game theory used to price items in retail stores? Why aren’t we choosing a pricing example when we are talking about pricing? Well, the answer is easy. If you have a dominant strategy, use it. The a real world game of pricing, you can sell items without being the lowest priced item, but your price sets which portion of the market you will capture as individual choose items based on what is available to select within there given location. Lowering your price may capture an extra percent of market share, but it no likely to have the biggest impact. A good sales person can always point out the differentiators that allow for a high point whether they are actual benefits or perceived benefits. Customers may be willing to go to a competing store a few doors down, but it would be impractical to travel 300 miles/kilometers to save a little money. The time investment makes it not worth the effort. Customers also have some level of brand loyalty that just simply does not exist in the game. However, the Auction House is really big store with various prices for a single item. Therefore, the only item that sells is the lowest meeting the buying criteria. The dominant strategy is to be the lowest priced item on the market when the buyers are looking for the item.
I see… price everything really low and you will get all of the sales. Woot, I am going to be rich!
Not so fast, you need to look at another pricing example from a video I saw at Interop last year, where two completing sock merchants on the streets of London compete for sales. Barney is selling his socks for 40p until the Franklin moves into the area. Then the two go back and forth lowering there price until Franklin realized that Barney is now selling below Franklins wholesale price and buys all of Barney’s sock for 4p a pair. Franklin quickly raises the price to 45p and is happy that his stock of socks can be sold without competition.
This is a strategy that I have used a number of times in the glyph market to reset margins. I will cover the glyph market in another segment, but the basic thought is to examine the market while posting. When just a couple of items are on the Auction House near your threshold, it is better to purchase them to reset the price to a higher point than to post at an ever slimming margin. As long as, your reset price is within reason, the market will progress, as it would have at the lower price, but with higher margins.
The basics of pricing in WoW for a given item are simple.
- Undercut by the smallest margin possible (1c). Anything larger just spends up the Sock situation.
- Don’t sell below a threshold unless you are trying to no longer sell that item. This threshold may be based on raw material cost or effort for farming typical or rare materials.
- Look for opportunities to buy all the socks. This will allow you to reset the pricing levels for higher profitability. Be cautious here, you won’t want to end up protecting a price point. If you are purchasing more than three to five items, don’t reset the price.
Until next time….have fun and sell like a crazy hunter, possibly a goblin hunter.