Thursday, 8 September 2011

Understanding liquidity - how to play the markets in games

I want to talk about liquidity. Liquidity in the economics sense means converting one item into another item easily. For example gold (real gold) can be sold for dollars and dollars can be traded for just about anything.

In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value. Money, or cash in hand, is the most liquid asset, and can be used immediately to perform economic actions like buying, selling, or paying debt, meeting immediate wants and needs.

Source: wikipedia

When I started playing Eve I realised something that I still find utterly astonishing - almost everything in Eve is liquid in the financial sense. Your battleship = 100m isk = a Sovereignty Blockade Unit. Stuff isn't perfectly liquid, there are transaction fees, price fluctuations, issues of location and so forth. But pretty much everything is at least 90% liquid. If you have a spare battleship and need a SBU you can exchange them without significant loss of value. Of course in certain circumstances such as price gouging and other market manipulations you may lose value but these are exceptional.

In WoW most items are not liquid. Your bind on pickup epic may be worth 1000 gold but you can only vendor it for 20 gold or at best disenchant it for 50 gold's worth of mats.

Let's now have a look at Diablo 3 where we will see some astonishing factors of liquidity. Just about everything not only can be converted to gold but also to real money (unless you play hardcore). Understanding liquidity in the game could have a profound effect on the way you play it. I'll illustrate with examples.

Example 1: non-liquid inventory management.

Barb character - loot discovered = one Barb sword, one Wizard wand, 5000 gold, 20 junk blues and rares, 5 assorted gems.

Barb uses sword and the damage gem, stashes the Wand in case they want to roll a wizard one day, vendors the junk blues, saves the gold, stashes the spare gems.

Example 2: liquid inventory management.

Barb character - loot discovered = one Barb sword, one Wizard wand, 5000 gold, 20 junk blues and rares, 5 assorted gems.

Barb uses sword. Trades the unwanted gems for damage gems and cubes up to make a really strong damage gem. Sells the Wand and buys a second Barb sword for dual wielding. Spots that crafter mats are expensive on the RMAH, salvages the junk blues for crafter mats, buys extra crafter mats on the gold AH, sells all of these crafter mats for real money.

This Barb has an extra weapon, a better gem and has stored his surplus in a more mudflation-proof currency than the first player.

All because he sees that anything can become anything else. Alternatively he could have used his RMAH profits to outfit his Barb better without spending more real money than the guy who just casually slings it into his stash.

If you take this to the highest level you monitor values across a range of markets and play them. Gold is selling high? Vendor/auction everything you don't need and sell the gold. RMAH legendaries are cheap? Raise real money using other surplus stuff and buy an uber weapon to kick butt with.

In a game where everything is liquid there is huge advantage to be gained by trading, selling to expensive markets and buying from cheap markets. What you shouldn't do is sit on value. Let me give another example:

Example 3: Non-liquid Barb player discovers a Windforce, an uber elite legendary bow. It's the first Windforce in the game and will sell for £2000. However he decides he wants to make a Demon Hunter. He rolls a new character and spends the next 2 weeks leveling his Demon Hunter, finally reaching level 60 and equipping his magnificent bow.

Example 4: Liquid Barb player discovers a Windforce, an uber elite legendary bow. It's the first Windforce in the game and will sell for £2000. He decides he wants to make a Demon Hunter but knows he's best cashing in now. He sells the Windforce for £2000. He rolls a new character and spends the next 2 weeks leveling his Demon Hunter, finally reaching level 60 and buying a Windforce, (several of which have now been found) for £200 He equips his magnificent bow and ponders how to spend his £1800 remaining funds. Maybe he'll wallpaper his house in Blizzard T-shirts. (Warning: RL Blizzard T-shirts are probably not very liquid).


  1. I've used auction houses for various combinations of "storage" (i.e. sell, buy back if you need it later) and "crafting" (i.e. sell mats, buy finished goods) to good effect in various MMO's I've played. That said, the RMAH adds a wrinkle because there is a RMAH-Listing-Fee. If it turns out that even the game-first Windforce won't sell for 2K, that player is out real money for having asked that much for it.

    There will probably be some people who make decent amounts of money on the RMAH. There will also be a bunch of people who think they're going to make money, only to learn that people may behave differently when they're bidding real money as opposed to WoW gold.

  2. Absolutely.

    I think one of the fascinating aspects of this game will be witnessing the sociology.

    I wonder if any academics are preparing to write papers on the D3 AH. Probably.

  3. Good article. So many people horde when it isn't to their advantage. As Green said though, the listing fees may have a strong impact on liquidity. Blizzard said they would be small and not scale with sale price. This benefits the liquidity of big ticket items and hurts the liquidity of cheaper items.

    What is your take on insider trading? For instance, lets say you have the scoop on the fact that Blizzard is going to implement a major gold sink next patch. Knowing the supply of gold will sink, (and therefore rise in value) you could make a killing on just that insider info alone. Or if item drop rates change.

    So many possibilities...

  4. I certainly accept that items won't be 100% liquid. But do bear in mind that it will be a strongly inflationary economy. So you may pay 50p on an item you sell for £5 but if you hang on to it it will very likely lose more than 50p of value.

    Also face to face trading with other players is available. I would definitely recommend doing this.

    As for insider trading I hope Blizzard have some pretty sophisticated controls on staff. There are all sorts of things employees could do to enrich themselves at the expense of the system. Not just insider trading but selling the source code to dupers etc. I am sure Blizzard is very aware of these risks and has stringent defences in place. Whether they will be adequate only time will tell.

  5. Why do you think some people are so resistant to this idea? I know plenty of hoarders too, and players who don't have that sense of 'well you're not going to use it any time soon so why not sell it?'

  6. "I wonder if any academics are preparing to write papers on the D3 AH. Probably."

    I talked to the proffesor of microeconomics at my university,and it seems likely that I will write my bachelor thesis (is thesis the right word, or is it only used for higher degrees?) about it and businessmodells in MMOs.

    So I will spend the next monthes thinking about it, and then go into full time grinding in the rest of the semester.

  7. Effort required to keep item:
    2 clicks (one to pick item, one to put it into bank storage)

    Effort required to list item on AH:
    Fight endowment effect
    Check price listings on AH
    Check item price history, if available
    Decide if you should undercut, and by how much (remember, no Auctioneer addons here)
    Check item "disenchanting" value
    Decide if you REALLY want to use those limited "free listings", or use actual money to list
    List your item
    Optionally, check for undercutters and relist if item is sufficiently valueable
    Repeat all of above if it doesn't sell

    That's pretty heavy brain load right there. Not a thing you do casually.

  8. For the mundane stuff the gold AH will be the place to go, the psychological threshold of the RMAH isnt there and the massive number of acteurs should keep arbitrage low, so while selling there may not get the best price, most people wont bother and settle for good enough (more gold than the vendor). If the gold economy crashes, then trade will get less, as people are more serious with "real" money.

    With special drops greed will be the motivation to use one of the five listings. Items with great value will be listed instant (fear of it going down), so if a player doesnt find 5 great value items, he is in danger of loosing his free listings and will post lesser goods at the end of the week, to not waste his free listings.

    Seems like that might be a good point in time to do your shopping if you look for bargains.

  9. @ Spinks Shalcker's answer. And I admit I struggle with the notion myself being inclined to packrat even though I know it's dumb.

    @ Christoff Sounds very exciting. Think about writing your thesis (whether it's a "thesis" is something you should check with your uni) on Diablo 3 rather than MMOs in general.

    It will be a very transformative time and quality academic research will be in short supply. It would be nice to see you do a thesis which gets a million hits after you publish it online and that couldn't hurt your grades.

    Regarding the velocity of the RMAH I'd point out two things.
    1) You get some auctions free every week. Most people will use those fully I think.
    2) People who don't think they will spend money may get swept up in the excitement. Blizzard games produce astonishing addiction and commitment among the players. In a genre where most people would spend $10 for a really good sword I don't think many people would worry about risking 10 cents to make $2. Even if you don't make the $2 you get 10 cents worth of fun.

  10. I think more people will use the AH than we might think. Its probably the only thing to do while waiting for your friends to log on to go "adventure" again. It will be easily accessible from the Bnet menu. We will see though since Blizzard said they will be enabling the AH at some point into the Beta. Although I think this will be purely the gold AH, because who in their right mind will spend real money on items they will lose when the beta ends?

  11. To be honest Leonidas I doubt Blizzard will even activate the real money auction house during Beta.

  12. I think you would be surprised how many people are prepared to pay for things that will be taken away at some point. They'll enjoy them now, and then be annoyed when they are taken away later. Fair trade-off. It's all about emotional states after all, nothing to do with "right mind".

    Though i agree that Blizzard are unlikely to test it during beta... on other hand, why not? As long as they limit it to blizzard-account-only, no take-out, maybe with some upper-limit restrictions, system does need to be tested to be sure there are no bugs to be found.

  13. I think they'll avoid doing this for the same reasons they're not using the RMAH for the hardcore game.

    People will make bad choices then blame them. Although legally they can cover their backs with EULAs they don't want the bad press of "I spent $400 on my character the Blizzard turned round and deleted it"

    Also from a software designer point of view, can you imagine beta testing a product where if you change something you could wipe out thousands of pounds worth of customers' money? Betas are meant to be places where developers can change things.

  14. Stabs: I think they probably should test it.

  15. Can't they test it by giving QA monopoly money?

    I can't even imagine how software professionals would engineer and tweak a program where a passionate and vocal playerbase was buying pieces as they went.

    Every change would destroy value for someone. Every fix would generate impassioned protest.

    Also Spinks you know how nuts people get. What if someone spent a million on Beta items? Then asked to carry them over into live.