Thursday, November 21, 2019

WoW Economics

Now that the new edition of Hidden Order is out, I'm thinking about doing another nonfiction book. One intriguing possibility is a book using World of Warcraft to teach economics. For example ...

Consider the economics of the auction market. To first approximation—perfect competition, zero transaction costs—the price of crafted goods equals their production cost. If we ignore the player's time, that's the cost of the materials to make them.

That breaks down for a variety of reasons, all economic. Crafting and selling takes time, time when some players would rather be doing something else — although that doesn't matter if there are enough who enjoy the auction house game. The market for many crafted items has only a small number of sellers at one time, giving imperfect competition and the possibility of cartels. To craft an item you need the pattern, bought from a trainer or other NPC or on the auction house, possibly at a high price. To learn the pattern, you need sufficient skill. It looks like a product with a fixed cost and a constant marginal cost — except that materials may get more expensive if you want to buy more of them, which gives an upward sloping supply curve.

On the other hand ...  making things can give you skill. One would expect, and  sometimes observes, products that  consistently sell for less than their materials cost, the difference being the price players are willing to pay in order to skill up. 

For many, indeed most, goods the market is thin. One result is price changes over time, most obviously between low population and high population hours and days. Some of them are predictable, but to make money by arbitrage you need a predictable price difference that more than makes up for the 5% auction house cut.

As all of this suggests, the auction house itself, the most obviously economic part of the game, could be used to teach a lot of fairly sophisticated economics. But there is much more.

Consider the matter of forming two player teams to do quests or kill things for loot and experience. The optimal team is probably a paladin and a mage. Why? The mage is the highest dps class, the paladin is both a good healer and a tolerable tank, so the team benefits from division of labor. A druid is also both a healer and a tank but also a tolerably good dps, so a druid has less need of a mage companion than a paladin does and will be willing to offer less favorable terms. That gets us to an important insight of comparative advantage: You want to trade with people who are not only good at what you are bad at but bad at what you are good at.

For an entirely different insight ... Of the first three fire elementals you kill, farming them to make the money to buy your mount, two drop (very valuable) elemental fire. The next ten drop nothing. Obviously Blizzard's random number generator is broken, perhaps deliberately.

It probably isn't. Humans are equipped with very good pattern recognition software, good enough to find patterns that are not there. Which raises the question of whether the business cycle is really a cycle or a random walk made to appear cyclic by the same mechanism.

There are a few of the examples that have occurred to me. The purpose of this post is to invite readers who have played WoW to offer more.

Note: My examples are based on Classic WoW, since that is what I now play, having given up on the standard version of the game some time back.


Eneasz said...

You may be interested in the "Devilsaur Mafia" phenomenon from some private servers, and the fact that Classic servers have so many more players that it was impossible to replicate it. In short, a group of players from both Horde and Alliance coordinated to dominate all seven Devilsaur spawns (needed for 2 pre-raid BiS leather pieces) and kill anyone who tried to challenge them. It's costly to enforce, and only works as long as there aren't too many people challenging them. Much more detail at and various other internet sources.

Eneasz said...

Maybe also of interest - since Classic is retreading the progression of the old vanilla content, there are some materials which are not valuable now, but will become valuable once the content that uses them is released. This gives a limited ability to foresee the future, and some people are purchasing materials now that will only become valuable later, which I assume affects prices at both time-points.

Eneasz said...

For example, the materials needed for Free Action Potions jumped in price the day that Blizzard announced PvP honor would be coming in two weeks, even though they wouldn't be useful until then.

John Dougan said...

I think you should expand to cover more MMOs. Obviously Eve Online is a good place to start. Guild Wars 2's economy was designed around several principles and has some interesting differences.

David Friedman said...


The problem is that I don't know those games, so am not competent to include them. It would be an interesting book, but it would require at least one coauthor.

BrTarolg said...

I have a background in professional trading, poker and maths

Wow is one of the most interesting economies for sure. You see a lot of parallels in real life trading to wow trading, including the existence of large numbers of speculators and unexpected market movements due to wrongly predicted investments/trades

Since the game is released in phases, there is essentially a "roadmap" in terms of what happens in supply in demand, similar to winter vs summer markets in real life. i.e In phase 2, we expect PVP consumables to start coming into high demand

Whilst traders initially thought this would allow for easy investments as you could predict the future, markets ingame especially on populated servers move quickly and prices have frequently long before future phases, and are often influenced by popular youtubers and other information disseminators on investments. There are many markets which have been massively over-invested which has caused prices to drop as phases come out and previous speculators have attempted to dump, causing the markets to crash.

Examples such as pristine black diamond, high in demand for dire maul release, were spectacularly overinvested and then resulted in a crash after

There are also lots of interesting observations in what happens in an offer only market (you can't set bids for items) as well as other common patterns in short term volatility. In real life short term implied volatility has trended towards zero because of robots, but in Classic Wow there is still a lot of room for short term traders to swoop in, even with the very high 5% AH fee

If you're interested in contacting me, feel free to send me an email as I am very interested in this particular topic and have expertise in both wow and trading

necrobushido said...

A week or two ago I was thinking about how similar the idea of price/wage rigidity was to the idea that the game designers may try to avoid nerfing characters in favor or inflating their stats to provide the same effect in new, harder content.

Path of Exile is another interesting game, in that they got rid of any common currency like "gold", and have a bunch of different "currency items" that have a use in and of themselves (performing various modifications to the items that drop in-game). I always wondered if it was some stealthy gold standard experiment.