Thursday, June 7, 2007

Auction houses

A reader wrote me to ask whether I had any idea why in World of Warcraft on the auction house a stack of items often sells at a considerable discount versus the price of single items. The short answer is that this is a perfectly normal risk management strategy of the seller in response to the imperfections of the WoW auction system. The long answer is the rest of this post. :)

Putting an item up for auction in World of Warcraft is a risk. The risk is caused by the fee you pay to put the item up, and the 24-hour maximum duration of an auction. If you don't sell your item, you get it back, but you lost the fee. The fee is based on the *vendor* value of the item, not the market value. If somebody buys the item, you get the fee back, but you pay another fee of 5% of the sales price. (15% on the neutral auction houses.)

The reason for the fees and the short duration is an attempt by Blizzard not to overload the database with too many crap auctions. Sales in WoW don't have a "Long Tail", people only put up items that they are reasonably certain that they will sell in 24 hours. And most of the time they put them up at more or less reasonable prices, because the higher price they put, the higher the risk of not selling and losing the fee. Only when the market value is much higher than the vendor value, e.g. with epics, do prices get outrageous sometimes, because the risk of losing 1 gold piece of fees is small compared to the possible gain of 1000 gold when selling the epic, even if it takes more than 24 hours.

The people who are most at risk of losing their fee are the sellers of commodities, ingredients for the various tradeskills like ores or primals. The reason for that is that the WoW auction house is not very well done, it is too transparent. You don't see any price history (unless you use an addon and did run that regularly), but you do see all the items posted, minimum bid and buyout, including who posted them. If you have for example 10 primal mana for sale and put them up individually at the going rate, there is a significant risk that somebody else will try to sell his primal manas 5 minutes later, will see your minimum bid and buyout price, and post his items for 1 gold less. As the buyers will always buy the cheapest item of the same kind, somebody else undercutting your price can really kill you. And the more items you post, the higher the risk. So instead of putting up the items individually at the going rate, you put up the whole stack at a discount. You lose money because you sell cheaper, but that is offset by the reduced risk of not selling the items at all.

The risk of being undercut is particular to the World of Warcraft auction house system. It is a bit annoying. Why should somebody selling his stuff 5 minutes after you have an advantage over you, by being able to see exactly your prices and undercutting them? Other games, for example Final Fantasy XI have better designed auction houses, where the reserve price that the seller put on his items is invisible. The buyer can see a price history of recent sales, and how many items are currently for sale, but he doesn't see the exact buyout price for the items currently for sale. He makes a bid, and if that bid is higher than somebodies price, he gets the item. He can find out the exact minimum by bidding low and slowly increasing his bid, but he can find out that price only by actually buying the item. So if he is a seller himself, he doesn't get that valuable price information from the other sellers. He can undercut the price history, but has no way of knowing whether somebody else put up items for even lower 5 minutes earlier.

Auction houses in general are good for the trade in commodities, for both buyers and sellers, because they are centralized. The limits to auction duration and the fees force people to come to a reasonable agreement on what the value of lets say one stack of iron ore is. Of course that market value can evolve over time, but the auction house prices reflect that. The disadvantage of auction houses as the main channel for player-to-player sales is in the trade of goods that aren't commodities, and sell slower. Depending on the age of your WoW server it is possible that the population of low- or mid-level character is currently very low. Thus the demand for a magic "green" item for those levels might be relatively low. With the market value already not much higher than the vendor value, and the fee to put the item up thus relatively high, many people prefer to just vendor these items and not lose money on the chance that nobody buys them. Thus the market in such items collapses. There is also no market for crafted low- or mid-level items.

Games like Ultima Online or Star Wars Galaxies have player housing which is usable as player run shops. Thus you can put a NPC vendor on your doorstep selling your wares to people passing by. So if you are a crafter, lets say a tailor, you can always keep your vendor stocked with cloth armor for all levels. The cost is usually lower, and you can leave items for longer time. So you can develop a reputation for being the place to go for all cloth armor needs in that area. This is essential for games like Star Wars Galaxies where not all crafted armor is identical, but there are differences in quality based on the quality level of resources used and the skill of the crafter. That creates a whole different quality of player economy, more personal and less anonymous than the auction house. I wouldn't want to miss the auction house for commodities, but whether it is the best channel for all item sales isn't that obvious.

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