Arbitrage, Comparative Advantage, and World of Warcraft
There is, however, a loophole—the neutral auction house. Goods can be put up by someone in one faction, bought by someone in the other. Two players can cheaply transfer goods between a horde character of one player and an alliance character of the other by offering the goods at a negligible buy-out price (the auction house charges a commission based on the price), with the timing such that as soon as one puts the goods up the other buys them. Ideally, it's done at four A.M., when nobody is likely to be watching the auction house for good deals.
My wife, who has characters in both factions (I don't), has observed that the prices of many goods are higher, at least on our server, on the Horde auction house than on the Alliance auction house. This suggests, to an economist, an obvious question. Given the loophole provided by the neutral auction house, why don't players engage in arbitrage? Buy goods Alliance side, transfer to Horde side, sell them. Doing that would drive up prices on one side, drive down prices on the other, resulting in roughly equal prices for both factions.
The answer is that although the neutral auction house provides an inexpensive way of getting goods from one side to the other, it does not provide an inexpensive way of getting money from one side to the other. Horde gold and Alliance gold are separate currencies; there is no mechanism that lets you inexpensively convert one into the other. It is no more surprising that prices Horde side in Horde gold are higher than prices Alliance side in Alliance gold than it is that prices in the U.S. in dollars are higher than prices in the U.K. in pounds.
Higher prices on one side do not, by themselves, provide an opportunity for a profitable exchange. What does provide such an opportunity is a difference in relative prices. If some goods are considerably more expensive on one side and others on the other, or even if some goods are considerably more expensive on one side and others about the same price, or even if some are much more expensive Horde side and some slightly more expensive Horde side, then trading goods for goods through the neutral auction house does provide the opportunity for profit—a fact that my wife and daughter long ago discovered and demonstrated.
A player who understands this, who sees that in order to profit from trade you need to exchange something relatively more expensive Horde side for something relatively more expensive Alliance side, has gone a long way towards intuiting the principle of comparative advantage and so towards seeing that most of what he reads about trade deficits and associated problems is nonsense. It makes no more sense to say "China can produce everything cheaper than the U.S., so U.S. producers can't compete" than it would to say "everything is cheaper alliance side, so how can Horde crafters compete?"
Putting it in terms of two different currencies oversimplifies the situation a little. There are at least two ways in which it is possible to transfer gold from one side to the other—at a cost. One is to use the neutral auction house, buying goods from your trading partner at an inflated price and paying the auction house's 15% commission. The other is to shift a character from one faction to another, for which Blizzard, when it permits it, charges $25. The character takes with him his possessions, including his gold. There is, however, a limit—even a top level character cannot bring more than 20,000 gold with him.
Suppose prices are 40% higher Horde side, which seems at least roughly the case for some goods on our server (Feathermoon). You buy 15,000 gold worth of goods from the Alliance side auction house, smuggle them across to the character of a Horde side friend through the neutral auction house, sell them for 21,000 gold, of which you get 20,000, with the extra going as a commission to the Horde auction house. One of you then gets a character transfer from Horde to Alliance, taking with him the 20,000 gold.
On net, you have turned 15,000 Alliance side gold into 20,000 Alliance side gold, at a cost of $25 plus a good deal of (hopefully entertaining) time and effort. The current gray market exchange rate of WoW gold for dollars makes one gold equal to about .7 cents, judging by ads spammed on my server. You have made 5,000 gold, worth about $35, at a cost of $25. Not a very profitable transaction—you would be better off using the neutral auction house, which would let you convert 20,000 Horde side gold into 17,000 Alliance side, paying 15% to the goblins in gold but leaving you with a clear profit of 2000 gold, worth about $14.
All of which suggests why arbitrage does not wipe out the Horde/Alliance price difference.
I looked for realspace equivalents to moving character and gold from one faction to the other and found one. When Germany was reunified, the government decided—in my view foolishly—to treat East German marks as equivalent to West German marks, despite the fact that, prior to that, one West German mark exchanged for substantially more than one East German mark. An enterprising German who correctly predicted that decision could have bought goods in West Germany, smuggled them into East Germany and sold them—no doubt at some risk, but I do not know how great a risk during the period just before unification—and then turned his East German money back into West German money at one to one when Germany unified. I do not know if anyone actually did so or not.
Some time back, I suggested that WoW had potential for teaching economics. This post is an attempt to support that claim.