Thursday, October 30, 2008

WoW glyphs and market value

My mage in World of Warcraft is still making good money selling glyphs, but only with minor glyphs. That seems strange, because "minor" glyphs have a much smaller effect than "major" glyphs, and should be less valuable, given that the cost to make them is about the same. But the very idea that the value of something is determined by its utility or cost to make it is flawed.

If you observed European stockmarkets this week, you might have heard something very funny happening: The shares of Volkswagen, a German car manufacturer, gained over 300% in value in two days, before falling down again. At one point Volkswagen was the most valuable company in the world, having a market capitalization higher than Exxon Mobile. So what had happened? Before this week there were many speculators betting on Volkswagen shares, like most automobile shares, going down in the future. These bets were made in the form of short selling, a practice in which you sell shares you don't have, either by borrowing them, or by making an empty promise to sell without having anything, the so-called "naked" shorts. But this week Porsche announced that they were in the process of buying Volkswagen shares, and that they were already controlling by various means 75% of the shares. And it was known that another 20% of the shares were held permanently by the state in which the main factories of Volkswagen are in. Thus 95% of the Volkswagen shares were in the hands of people who wouldn't sell them. It quickly became clear to the shortsellers that if noone was selling, then the share value drop they betted on would never happen. So now they needed to "cover their positions", that is buy the shares they didn't have but already sold. And they had to buy them at any price, which drove up the VW shares to so fantastic heights. Apart from a valuable lesson about the dangers of short selling, the story tells us that the market value of the Volkswagen company has absolutely nothing to do with the fundamental value of its factories, or some projected earnings expectations. The price was determined by having a small supply and large demand.

The economy of World of Warcraft is a lot simpler, but the same basic truths apply: The market value of items, in this case glyphs, has nothing to do with any fundamental value of that glyph, and everything to do with supply and demand. Inscription is a new profession, so many people learn it just because it is new. And to skill up, they can only make major glyphs, as those are the recipes learned from the trainers. The minor glyphs are learned by research, one recipe per day. Because people are impatient, want to skill up fast, and have excess money to burn, they buy the ingredients (herbs). Then they produce lots of major glyphs, which floods the market, and drives the prices down. In the end they paid more for the ingredients than they get back for selling the glyphs, accepting that skilling up a profession means losing money. But as nobody makes minor glyphs to skill up, and everyone has only a few minor glyph recipes compared to lots of major glyph recipes, the minor glyphs are relatively rare. And although their effect is often just cosmetic (polymorph penguin for example), some people are still willing to pay for that. So it comes that minor glyphs sell for considerably more than major glyphs. I check the AH every day for all minor glyphs that I can make, and then only produce those where the current market price is over 20 gold, which is my standard sales price. As even with high herb prices I can make that glyph for about 10 gold, I'm making good money. Plus often I don't pay that 10 gold, but gather the herbs myself, so I only incur an opportunity cost.

But I'm fully aware that there is no such thing as a fundamental value of glyphs. The price for major glyphs will rise once there are few new inscriptionists skilling up, because if you are at the skill cap, there is no reason to make a glyph to sell at below cost. The market value of minor glyphs will go down, as every inscriptionist will learn a new recipe every day, and they will become less rare. In the end the prices for the two types of glyphs will be very similar.

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