Anyone out there with a background in economics?

  • #1
    Curious if anyone in the community has worked on economic models before. I would love to know their insight into all the limitations and gold sinks that Diablo has in effect and how that will drive the value of virtual goods in D3.
  • #2
    Wow is a good starting place to figure that one out. Gold sinks are just tools used to counter the fact that an infinite amount of gold can drop from enemies. Of course some players can learn how to play the economy in their favor and control large chunks of gold despite the sinks. Blizzard is usually good at balancing things though. I'm not too worried.
  • #3
    Gold auction house is not terribly complicated.

    Gold does appear to actually be a currency in Diablo 3. It was not a currency in Diablo 2. So unlike in Diablo 2 there's not a ton of pressure to move to an alternative currency regime immediately.

    Currency supply is controlled by a negative feedback loop from the auction house fee. Essentially, as people accumulate more gold, prices rise on the auction house, which sinks gold more quickly. Napkin model tells me MV is more or less determined by the gold drop rate and is fixed.

    Total goods available for sale should increase over time since goods are all durable and are not sunk in any way. So expect prices in gold to drop; more precisely, value will concentrate more and more in the very best drops as time goes on.

    On the RMAH, you have an external currency. Demand for game goods will start high and decline with time. Supply of game goods will start low and increase with time. Expect prices on the RMAH to start sky high and quickly crater.

    As prices on the RMAH crater, more items will be pushed onto the GAH. This will drive down the gold price of those items further, as more and better items compete for a more or less fixed pool of gold.

    Short version: expect gold to hold value better than items.
  • #4
    This is what I expect as well though might not have a great theoretical understanding of why it happens. I expect the RMAH to move geometrically in a reverse asymptote (away from infinity) towards the baseline of fees imposed by paypal and blizzard.

    the straightforward approach to profiting off of this would be to sell any items of decent quality immediately on the RMAH on release day.

    Would a backwards approach being to sell everything for astronomical prices from the beginning on the GAH and save that currency for the point when the RMAH to GAH ratio favors gold?

    Interesting notes on the GAH, and I expect new expansions to start this process all over again starting from infinity...

    I also have no idea what this means "Napkin model tells me MV is more or less determined by the gold drop rate and is fixed". is there a wikipedia link that you could reference to make light of the jargon you use.

    Thanks for the less heard insight on the game too!
  • #5
    Quote from Ensign
    Gold does appear to actually be a currency in Diablo 3. It was not a currency in Diablo 2. So unlike in Diablo 2 there's not a ton of pressure to move to an alternative currency regime immediately.

    - What makes you believe so in a world where nothing decays and where you get endless supply of gold just by playing?

    Quote from Ensign
    Currency supply is controlled by a negative feedback loop from the auction house fee. Essentially, as people accumulate more gold, prices rise on the auction house, which sinks gold more quickly. Napkin model tells me MV is more or less determined by the gold drop rate and is fixed.

    - The rising prices phenomenon in real life is called inflation, which means that the money is losing its buying power and becoming worthless.

    Quote from Ensign
    Total goods available for sale should increase over time since goods are all durable and are not sunk in any way. So expect prices in gold to drop; more precisely, value will concentrate more and more in the very best drops as time goes on.

    - Items have value by themselves, because they can be used in the game. The big question is, can this value be transferred to gold? If you get the best item in the game, the only other currency that can carry that value is real life money. In-game gold can't carry the value simply because you will never come close to getting good items just by spending gold. Value of gold is determined by what it can buy outside of auction house. There's a good chance you're being bottlenecked by crafting materials instead of gold when you craft items. If this happens, no sensible person trades their crafting materials for gold.
  • #6
    Am I the only one that thinks there are too many variables and not enough late-game information to make accurate predictions at this point? We can only speculate about the value of gold because we do not know how late-game gold drops will work. Not all the items have been set yet. Blizzard can also "tweak" the economy by changing or adding items via patches.
  • #7
    Quote from Jack in the box

    Am I the only one that thinks there are too many variables and not enough late-game information to make accurate predictions at this point? We can only speculate about the value of gold because we do not know how late-game gold drops will work. Not all the items have been set yet. Blizzard can also "tweak" the economy by changing or adding items via patches.

    I think this is a great place for us to start!
    lets try and come up with a finite list of all the tools blizzard could use to change the economy.
    heres what I see right now
    -$ flat fee
    -gold drop rate
    -total item variation and item count
    -the data they give us for last ten trades and last day of trades for gold to $

    any more?
  • #8
    -Item drop rate (including gems)
    -Max auction values (capping all auction items at a specific $ amount)
    -More endgame content that is item dependent (something like D2 ubers)
    -Difficulty of farming
  • #9
    Quote from underarock
    Would a backwards approach being to sell everything for astronomical prices from the beginning on the GAH and save that currency for the point when the RMAH to GAH ratio favors gold?

    I don't think that will work out exactly like that - the big piles of gold that you'd want to sell high ticket items for just won't exist early on in the game's life cycle. It will take a while for people who will eventually have the big war chests to build up to that. Also, for very high ticket items, remember that the RMAH, as it stands, has a flat fee, while the GAH takes a percentage. Even if you just want gold, for a big enough ticket item it will make sense to sell on the RMAH and buy gold with the proceeds.


    Quote from underarock
    I also have no idea what this means "Napkin model tells me MV is more or less determined by the gold drop rate and is fixed". is there a wikipedia link that you could reference to make light of the jargon you use.

    I'm mostly just writing down the equation of exchange (an accounting identity) and making some guesses about how terms will move in relation to each other. Start here:

    http://en.wikipedia.org/wiki/Equation_of_exchange


    Quote from abu11
    - What makes you believe so in a world where nothing decays and where you get endless supply of gold just by playing?

    'Real world' money doesn't decay either - if it did, it wouldn't be money.

    You get a potentially endless supply of gold just from playing, for sure, but you also get an endless supply of items just from playing. The economy is based on exchanging one for the other. There isn't enough information just in stating those facts to make predictions about how things will play out.


    Quote from abu11
    - The rising prices phenomenon in real life is called inflation, which means that the money is losing its buying power and becoming worthless.

    Take a step back for a moment. What do we really mean when we say that there is inflation? Take a really basic two good model - there is 'money', and there is 'everything else'. At any point in time, there's some supply and demand equilibrium between money and everything else. Not at some future point in time, there will be a different equilibrium. Holding all else equal, if there is greater demand for everything else, or a lower supply of everything else, or a greater supply of money, or a lower demand for money, then the price of everything else in money will go up, and you will have inflation. If instead, holding all else equal, there is lower demand for everything else, or a higher supply of everything else, or a smaller supply of money, or a greater demand for money, then the price of everything else in terms of money will go down, and you will have inflation.

    In reality you have a balance of all four of those factors moving somewhat independently, giving you the overall change in price level. Money never becomes worthless; if you have massive inflation or deflation, the instability, in reality, makes your currency stop functioning as money, and people migrate to new money.


    Quote from Jack in the box
    Am I the only one that thinks there are too many variables and not enough late-game information to make accurate predictions at this point? We can only speculate about the value of gold because we do not know how late-game gold drops will work. Not all the items have been set yet. Blizzard can also "tweak" the economy by changing or adding items via patches.

    That's the reason I'm being pretty conservative about the sorts of predictions I'm willing to make. The kinds of questions you're asking will absolutely have a large effect on what the actual price levels of various items in the game are. Will end game items cost 100,000 gold or a million gold or hundred million gold? We don't know. I can't possibly tell you that.

    What we can do is look at the systems and make good predictions about the shape of the curves things will make. We may not know how much items will cost in an absolute sense, but it's not a stretch at all to say that there will be more top tier items, per player, on the auction house a year after launch than a week. How many more? I don't know. But you know that will trend up.

    All these predictions are of that sort.
  • #10
    Quote from Ensign
    'Real world' money doesn't decay either - if it did, it wouldn't be money.

    - Decay is not a part of definition of money. Coins and bank notes do decay over time and need to be replaced.

    Quote from Ensign
    You get a potentially endless supply of gold just from playing, for sure, but you also get an endless supply of items just from playing. The economy is based on exchanging one for the other. There isn't enough information just in stating those facts to make predictions about how things will play out.

    - Alright, let's take a parallel to real life. By doing a thing X you get all your needs (=items) fulfilled and lots of money (=gold). Now if you have all your needs fulfilled you have no need for money anymore. Just because something can be exchanged to something else doesn't mean people will agree to do it. There has to be an two-way incentive for both parties in a trade.

    Quote from Ensign
    Take a step back for a moment. What do we really mean when we say that there is inflation? Take a really basic two good model - there is 'money', and there is 'everything else'. At any point in time, there's some supply and demand equilibrium between money and everything else. Not at some future point in time, there will be a different equilibrium. Holding all else equal, if there is greater demand for everything else, or a lower supply of everything else, or a greater supply of money, or a lower demand for money, then the price of everything else in money will go up, and you will have inflation. If instead, holding all else equal, there is lower demand for everything else, or a higher supply of everything else, or a smaller supply of money, or a greater demand for money, then the price of everything else in terms of money will go down, and you will have inflation.

    - Mistake here is thinking money is goods. You have no need for money, you have a need for things money can buy.
  • #11
    I am extremely happy with this discussion and glad people out there take this theory into consideration.

    I am curious if there are observable and recordable data points that one person or a group of people could collect that the game denies you

    obviously there is the gold to dollar exchange rate over time, that data doesn't seem to be available in the beta except for the past tent trades and the last days worth of trades. A larger data set could be used for pattern recognition.

    The lack of an API for the AH's means that a full set or automated collection of data will never be available unless Blizzard just puts it out there (and monkeys might fly our of my butt).

    So what could we as a community collect that would be worth analyzing?

    ...If I am getting it right, it seems, that the ultimate value in the game is Time, the more time you put in the more probabilistic gear and gold/$ you will get. You can buy time away from others through the dollar value which will change over time because of the supply and demand of in game items and gold. <--open to critique and correction! I am a complete laymen to economics and trying to get a basic understanding through rad peeps on the forums who are much much smarter than me.

    Thanks dudes and dudettes
  • #12
    Quote from abu11
    - Alright, let's take a parallel to real life. By doing a thing X you get all your needs (=items) fulfilled and lots of money (=gold). Now if you have all your needs fulfilled you have no need for money anymore.

    If you acquire all the items you ever want just by playing then you have no need for trade. You can stockpile a giant pile of gold for yourself. Since you do not trade with other players, none of the items you find or that giant pile of gold influences the player market in any way. As your presence in game consumes no rival resources, your net effect on the external player economy is zero.

    If I *did* want to include you in monetary aggregates, I'd have to add your gold to M, and subtract the fact you don't spend it from V, which on the whole would have...no effect. I could include the items you found and kept in Y, but when you add that to the overall accounting balance you treat those items as being sold to yourself...so again, you're just putting a +C onto it.

    This isn't terribly complicated. If you don't use the auction house you don't have an impact on the player economy. That should be obvious.


    Quote from abu11
    - Mistake here is thinking money is goods. You have no need for money, you have a need for things money can buy..

    Money can absolutely be treated as a very particular kind of good - a good that provides a liquid medium of exchange, a divisible unit of account, and a store of value. You can say that you don't have a 'need' for money, but that's different from there being a demand for money - of which there is ample. It's an essential feature of all but the most trivial of economies. There is value in a medium of exchange that you can buy and sell with, because it overcomes the matching problem of buyers and sellers. Without money, you can only trade what you want to sell when you find a buyer who *also* has something to sell that you want to buy. With money, that transaction is broken in half - you only have to find a buyer, and then only have to find a seller, and they can be different people. This is a huge step forward in facilitating trade, and the more trade you have in your economy, the higher the demand for money for this purpose.

    Money also needs to be a differentiable unit of account, so you don't have to find items of equal value to exchange. You can price everything in terms of very granular money, making it easy to 'make change' from a trade, to add extra or take a bit back. Not only can you find different buyers and sellers with money, you can also shift the size of the trades, splitting up big sales into smaller buys or smaller sales into one big buy. Also, as a store of value - you can sell without needing to buy immediately! If you're bartering, you can only sell when someone can buy; with money, you can sell whenever you have a buyer, and complete the other half of your exchange whenever you see fit.

    So yeah, you don't strictly need money. You can't eat money. But money is what makes trade work, and was a huge, huge invention in the progression of mankind. You don't sell for money because you need money - you sell for money because you need other goods, and are confident that you can exchange your money for things you do need.

    There's nothing fundamentally different about in-game money and US dollars or Euros or Renminbi or what have you. They are mediums of exchange that govern particular currency areas and goods bought and sold in those areas. While concerns about exchange rates and inflation / deflation are completely warranted and perfectly rational, I can assure you there is no reason to think gold in Diablo 3 will function any differently in the Diablo 3 economy than US Dollars do in the US economy.



    Quote from underarock
    I am curious if there are observable and recordable data points that one person or a group of people could collect that the game denies you

    Gold exchange rate should be pretty easy to monitor as a 3rd party; you'll have to write a bot to query the bid / ask price on gold frequently, but that should not be difficult and I would expect to see that data available fairly quickly after the game goes live.

    I would really like to be able to track item sale prices on the auction house. The stats geek in me would really love to beat that data set over the head with MRA and build a dynamic price guide for items.

    The lack of a specced API isn't fatal, it just means whatever software you use to gather data has to go through the human interface elements, which won't be nearly as efficient.


    Quote from underarock
    ...If I am getting it right, it seems, that the ultimate value in the game is Time

    From a very high level view this isn't a bad way to look at it. You can buy people's labor (time) directly, or you can buy the goods they produced in that time, or you can buy machinery that represents an investment of time and that produces virtual time. In the real world there's also non-renewable resources in the equation, but even a lot of those you can measure in time (I'll joke with friends about a barrel of oil being equivalent to about 6 slave years). In the Diablo 3 universe it all starts from zero, however, so everything represents the output from time input, and yes, you're absolutely trading that time around in your exchanges.
  • #13
    Quote from Ensign


    The lack of a specced API isn't fatal, it just means whatever software you use to gather data has to go through the human interface elements, which won't be nearly as efficient.



    I suggest this being a very bad idea to anyone out there, Warden (if warden is working for diablo as it does for WoW in catching bots) will most likely catch and suspend your account and you will be violation of the EULA. I believe blizzard to have this game on total lockdown for bots and modding and data collection because of the effects it would put into play on the economy.
  • #14
    Quote from Ensign
    This isn't terribly complicated. If you don't use the auction house you don't have an impact on the player economy. That should be obvious.

    - True enough. If we take this into more abtract level, would any rational agent have a need to use auction house without barter option. Gold needs are satisfied by playing the game and if there ever becomes a situation where you lose gold over time to repairs (gold gain - repairs = negative) then that is going to be horrible design.

    Quote from Ensign
    There's nothing fundamentally different about in-game money and US dollars or Euros or Renminbi or what have you. They are mediums of exchange that govern particular currency areas and goods bought and sold in those areas. While concerns about exchange rates and inflation / deflation are completely warranted and perfectly rational, I can assure you there is no reason to think gold in Diablo 3 will function any differently in the Diablo 3 economy than US Dollars do in the US economy.

    - You seem to take worth of money for granted. Whole wars have been fought between nations just because some country decided to lower their currency's worth to get competitive edge. History has many examples where hyperinflation has rendered currencies useless and people have reverted back to bartering to make living.

    Gold is not exactly the same as real money, since gold can't get you any good items in Diablo III. This problem had extreme proportions in Diablo 2. Nobody would trade their Stone of Jordan for any gold you'd give them, because there was no need for gold. What are the reasons to believe that gold is suddenly going to take its place as value holder in Diablo III?
  • #15
    Quote from abu11
    if there ever becomes a situation where you lose gold over time to repairs (gold gain - repairs = negative) then that is going to be horrible design.

    Player actions are not all equal. I assure you there will be masses of people who try to proceed in Inferno but need to go back to farm Hell for repair gold. Blizzard has stated they have planned it to work like this, and it would ruin their economy if it didn't. If gold just keeps piling up, they've failed. So they have to implement means to suck that gold out of the system.

    The players will keep producing wealth while they do this, whether they farm Hell or Inferno. Only the quality and number of those items will vary.

    Personally I'm most interested in how crafting will play out, whether the materials or gold will be the bottleneck. I'm not really sure which I would prefer, too tired to think about it properly right now. I'll try to come up with something tomorrow!
  • #16
    Quote from abu11
    would any rational agent have a need to use auction house without barter option.

    I don't understand this question at all. Do people *need* to trade with each other? No. Do they want to? Yes. Is it rational to want to trade with each other? Yes, since it's a value-adding activity. Is using a currency to facilitate trade rational? Yes. Is a 15% tax rate enough friction to drive a sizable fraction of players to look for an alterative scheme? I doubt it.


    Quote from abu11
    You seem to take worth of money for granted.

    I take it for granted that money has value, yes. I also take it for granted that if there is no money, people will invent money, spontaneously, to facilitate trade.


    Quote from abu11
    History has many examples where hyperinflation has rendered currencies useless and people have reverted back to bartering to make living.

    I do not take for granted that any particular currency will have value. Currencies collapse all the time and are replaced quickly with other currencies. There is no contradiction here. People will use a given currency as long as it functions as money; if it ceases to function as money, people will abandon it and find a new currency. We've seen this many times before (and are starting to see it in Greece today, actually, in the face of widespread deflation and currency shortages).


    Quote from abu11
    Gold is not exactly the same as real money, since gold can't get you any good items in Diablo III.

    'Real money' can't get you everything either. Individual currencies are only predominant in localized currency areas, and cover only goods, services, and assets within that currency area. To purchase goods in another currency area, you have to exchange your currency for the local currency, with which you purchase what you want. This leads to exchange rates and relative currency valuations depending on the economic situation in each currency area.

    Gold is no less a currency because you can't buy items on the RMAH any more than US Dollars are not a currency because you cannot use them to buy land in China.


    Quote from abu11
    This problem had extreme proportions in Diablo 2. Nobody would trade their Stone of Jordan for any gold you'd give them, because there was no need for gold.

    Ah, now I see where you're coming from. Gold in Diablo 2 had a distinct problem. For the first year of the game, a Stone of Jordan had a very clear price, in gold - roughly 5 million gold.

    There was no reasonable way for a player to trade for 5 million gold. Even the expansion only raised the gold cap to 2.5 million gold; it was a million if I recall correctly pre-expansion. How could you trade a SoJ for gold if you couldn't store that much gold, let alone carry it (which, I believe, is still limited to a few hundred thousand).

    So gold in Diablo 2 wasn't a currency. You couldn't store it in large enough quantities to use it as a medium of exchange. So the currency was abandoned. People needed a new currency - something uniform and compact enough that you could store it reasonably enough to pay for things. Perfect gems were tried at first, but weren't valuable enough to overcome the storage constraints. Which is why people turned to Stones of Jordan. They weren't nearly as differentiable, which made it hard to make change (perfects kept some value for a while for this reason); and they did still have a storage constraint (though much better than any other option available). But they were uniform (giving them consistent value) and readily available (you could gamble them up for ~3.5 million gold each) - and there was nothing better available - so they became the de facto standard.

    The *only* reason gold failed as a currency in Diablo 2 was the gold cap. If there was never any storage or carry limit on gold I am confident that people would still be trading items for (millions and millions) of gold today. Everything else about the economy of that game was set up sufficiently to support gold as a stable currency, but that one innocent mistake wrecked it.

    I don't see a comparable mistake in Diablo 3, so I have no reason to expect gold not to function as money.


    Quote from sooru
    Personally I'm most interested in how crafting will play out, whether the materials or gold will be the bottleneck.

    It really needs to be the materials; if the bottleneck is gold, then the materials will be essentially worthless.
  • #17
    There are simply too many unknown variables to start crunching numbers on this.

    We don't yet know the income at max level and we don't yet know what sort of expenses max level maintenance will require - repairs, pots.

    Now, all we CAN do is have a look at the model and try to guess whether or not its sustainable.
    On one hand we have an income model where time seems to main driving force, as there is basically a limitless amount of gold available - we just need the time to collect it.

    On the other hand we have a renewable market of goods that, in theory would keep expanding, which would drive the overall prices down, however, what blizzard did to counter this, is pretty clever( and would be completely idiotic in the real world). They introduced a system that not only takes items out of the economy by salvaging them, in order to introduce new items to the economy by crafting, at a rate that is much greater than 1:1 - without any real promise of payout. Basically, they're forcing us to eat away at our commodities in hopes of hitting it big with the perfectly rolled item (for which the chances are national lottery-ish). Statistically, you'd have to salvage thousands and thousands of items to get that one perfect 6-stat rare item.

    What this will most likely do is make the lower and medium level items fairly accessible and the items with perfectly rolled stats insanely expensive, seeing as they're incredibly rare and the seller will most likely attempt to regain the value of all the salvaged items. At some point in time, when or if perfect items become more and more regular, we can of course expect to see the prices drop and lesser items being simply salvage-goods, however, at the same time we can probably expect to see the buying power of 1 gold drastically decline as people continue to earn even after they stop spending, which would make drive the inflation up quite a bit.

    To me inflation seems inevitable, question is just how long it will take. Could also be that they have other things in store for us we don't yet know about. It's anyone's guess :)
  • #18
    I said this on Reddit and I'll say it here. If we as a community can agree not to hyper inflate the economy it will be a much funner experience. Think about it. I'll use an example from WoW. On Blackrock US a few friends of mine, myself included played the AH a lot. Keep in mind this was at the peak of BRs most recent flood of pvpers and best of the best guilds. We all noticed a major change in prices, they all skyrocketed in almost every market. We devised a plan to lower all the prices and talked a lot of the people into helping us. Long story short, Everyone could afford anything give or take a few of the rarest mounts and stuff like that. We never really got to finish the experiment but we did come to the conclusion that if we had got more people to participate it could have started a server revolution. More people having more affordable items in turn making items sell faster for less. Nobody ever did the math, but in the market I was in I might not have been selling each item for a high amount but I was making more gold faster than I was selling at a high price. To create a flourishing economy is not that hard, it's when those people who think they will come in and get rich quick gets involved is when it starts to get destroyed.
    But as of this second, nobody will know the outcome of this until the end game value on gold is determined.
    Cool thing is.. We as the community are the ones that will be determining it.
  • #19
    That's basically how for example this guy promotes doing business. Lots of small sales, the more impatient sellers who crave larger profit margins per sale will quit. With AH being regional, not per server, I'm sure there are enough people who have the smarts to do it. Or rather, with tens of thousands of sellers, it might even be a continuous stream of undercutting that settles automatically to the lowest sensible price range.

    Remains to be seen how much the time requirement imposed by only having 10 AH slots affects the outcome.

    I'd be glad to hear more about your Blackrock experiment, even though the market will be very different in D3. The way I see it is that a lot of people colluded (don't take the word in negative context here :P) to lower prices so a portion of the gold generated by whatever means was simply flowing to gold sinks in the form of mounts and other vanity items, instead to some merchants' pockets, increasing player happiness on average.
  • #20
    10 items limit -> there will mostly be relevant stuff
    real money -> people will sell a lot

    sell a lot + relevant stuff -> low prices of relevant stuff.

    Lot of hardcore gamers (not hadcore characters) -> lot of farming end-game
    lot of farming end-game -> best items will be available

    gaming population reaching end-game will grow with time -> end-game items prices lowering with time

    -> near end-game stuff (hell stuff) will be quite cheap after times

    some polls suggested that pure buyers will be much fewer than pure sellers -> Demand will be lower than offer (hence low prices)

    To people who want to get rich by selling stuff , only 1 advice -> the closer to lauch, the higher the prices

    As you can see, only very obvious things that informed players already know.
    I just compiled them in the shortest possible form I could find
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