A massive issue with current markets and how to really fix it.

[HurtigeKarl]

Assume that any crafter is able to earn 3k gil per minute just by doing dungeons and selling the materials from there. This means that to make crafting worth it for the crafter, he has to earn 3k gil per minute spent crafting. As long as that goal is met, he will keep crafting, if he makes lower than that, he will just do dungeons.

Assume next that a certain HQ item costs 10k gil and 2 minutes to craft and post. Given that there is 5% tax on sales, it means that the crafter needs to post his at least at (10000 + 6000)/0.95 = 16842 gil to be on par with dungeon grinding.
Assume that there are on average 10 buyers per day willing to purchase that item for more than 3000 but less than 50000 gil. Assume that are far more people that are able to craft that gear than there are people willing to buy that gear that day.

Behold the 10 lowest postings in that market:

1. 39997
2. 39998
3. 39999
4. 40000
5. 40001
6. 40002
7. 40003
8. 40004
9. 40005
10. 40006

So what's happening here? Since the people buying the item don't care about the price as long as it is below 50000 and above 3000 (i.e. in Supply-Demand graph, there is a vertical line at 10 quantity from the price=3000 to price=50000), and there is a far higher supply around price=40000, people who think there are enough active will try to undercut the price of other people by 1 gil. As long as on average they make more money per time spent crafting and undercutting this way compared to dungeon-running, they will keep doing this.

Who are getting hurt by this? It is not the casual sellers, since those could just simply list at the 16842 gil to make enough profit to make it on par with dungeon-running. It is certainly not the active 1-gil undercutters. No, those who suffer are the buyers. Due to the 1-gil undercutting, it takes forever until the equilibrium price (i.e. the price at which the demand and supply are exactly the same). Because currently in the market, at those prices, the supply is far higher than the demand; it is not at equilibrium.

So what should we do? We should introduce a posting and readjusting fee designed so that given that the initially posted item gets sold without any readjustment, the total gil lost through tax is exactly the same as it is now. Of course, the readjustment cost has to be max as high as the posting fee, otherwise people willl just withdraw and repost their item. One way to do this is: 2.5% posting fee, 2.5% readjusting fee, 2.5% successful sell fee.

How will this affect the market? First of all, this will remove the 1-gil-undercut strategy. Because constantly undercutting each other by 1 gil will quickly make their profit go below the one of the casual seller without being able to beat the price of the casual seller, at which point the 1-gil undercutter was just better off doing dungeons for profit. So if they are going to undercut each other, it better be a huge undercut so that other sellers are not ready to sell their reposted product at that price point. Or at least an undercut so that at the new price point, the demand and supply are exactly the same: i.e. you have reached the equilbrium price.

Something to keep in mind is that 39997, 39998, 39999 and 40000 would all be considered to be the same price in a supply-demand graph. The only reason for why not everyone attempting to sell around those prices are not able to make a successful sell, is because all of them are above the equilibrium price and therefore the supply at that price point is not the same as the demand.
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I've read many posts of what's wrong with the market and how sellers hate it. However, the current market is not one that sellers should hate, it actually benefits them a hell lot. Those who should cry are the buyers, because they are the ones who are being negatively affected by the fact that a hell lot of markets have a current price that is far above the equilibrium price. A major reason for why this is happening is the 1-gil undercutting.


A market that quite often reaches their equilibrium price is the resistance materia one on the other hand.
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[Zigkid3]

Behold the 10 lowest postings in that market:

1. 39997
2. 39998
3. 39999
4. 40000
5. 40001
6. 40002
7. 40003
8. 40004
9. 40005
10. 40006

So what's happening here? Since the people buying the item don't care about the price as long as it is below 50000 and above 3000 (i.e. in Supply-Demand graph, there is a vertical line at 10 quantity from the price=3000 to price=50000), and there is a far higher supply around price=40000, people who think there are enough active will try to undercut the price of other people by 1 gil. As long as on average they make more money per time spent crafting and undercutting this way compared to dungeon-running, they will keep doing this.

Who are getting hurt by this? It is not the casual sellers, since those could just simply list at the 16842 gil to make enough profit to make it on par with dungeon-running.

Have you ever been to an auction before? How often does a car up for auction go from 20,000 to 20,001, to 20,002....? you don't. you'll see it go from 20,000 to 20,500 to 22,000 to 22,200. there will be jumps. yes, some people will undercut by a gil, but there will be people willing to make bigger jumps which will force everyone else to do the same.

You even contradicted yourself when you said that the casual sellers will continue to list at 16,842. If that is the case then the lowest price will be set by the casual sellers at 16.8k and no one would even bother to buy the 39k+ ones because the 39k+ ones that you said are the lowest postings, are actually not the lowest postings.

I'm going to go buy those 16.8k ones instead. good luck trying to sell at 39k unless you drop it to 16.8k like the others.

[HurtigeKarl]

Have you ever been to an auction before? How often does a car up for auction go from 20,000 to 20,001, to 20,002....? you don't. you'll see it go from 20,000 to 20,500 to 22,000 to 22,200. there will be jumps. yes, some people will undercut by a gil, but there will be people willing to make bigger jumps which will force everyone else to do the same.

You even contradicted yourself when you said that the casual sellers will continue to list at 16,842. If that is the case then the lowest price will be set by the casual sellers at 16.8k and no one would even bother to buy the 39k+ ones because the 39k+ ones that you said are the lowest postings, are actually not the lowest postings.

Casual sellers can list at 16842 to be on par with dungeon-grinding income-wise. Of course, if they are dumb and aim for far higher profit margin per sale rather than looking at their profit per time invested, it will lead to situation where they try to compete with the 1-gil undercutters at the higher prices but utterly fail at doing so. Then they come to forum and complain about how people are undercutting them.

Let's say the casual sellers as a group only post a total of 4 times per day at 16842. That wouldn't meet the total demand of 10 per day at the price range of 3000-50000, which leaves 6 sales for the 1-gil undercutters to charge far above the equilibrium price.

How can you test that the 1-gil undercutters are at that point charging above equilibrium price? Well, put a bid at 35000 gil and watch how they like cockroaches start 1-gil undercutting you.

A major point is that the sellers are not the victims at all in the current system. They are those who benefit from this system, both the 1-gil undercutters and the casual thinking players.

The victims are the customers. Well not every customer, because sometimes a player puts a bid below equilibrium price, but in most cases they are.
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As for auctions: that's why well designed auctions either officially or unofficially implement a rule stating that the increment of a bid should at least be X% of the opening price or Y% of the previous bid. A such rule would encourage people to act now rather than later, analagous like having Z% of inflation encourages people to "use" their money now rather than let it rot in their home.

[Orophin]

Not sure where you're getting this 3k per minute figure. I certainly don't make 90k running AK in 30 minutes.

[Zigkid3]

Casual sellers can list at 16842 to be on par with dungeon-grinding income-wise. Of course, if they are dumb and aim for far higher profit margin per sale rather than looking at their profit per time invested, it will lead to situation where they try to compete with the 1-gil undercutters at the higher prices but utterly fail at doing so. Then they come to forum and complain about how people are undercutting them.

Let's say the casual sellers as a group only post a total of 4 times per day at 16842. That wouldn't meet the total demand of 10 per day at the price range of 3000-50000, which leaves 6 sales for the 1-gil undercutters to charge far above the equilibrium price.

How can you test that the 1-gil undercutters are at that point charging above equilibrium price? Well, put a bid at 35000 gil and watch how they like cockroaches start 1-gil undercutting you.

A major point is that the sellers are not the victims at all in the current system. They are those who benefit from this system, both the 1-gil undercutters and the casual thinking players.

The victims are the customers. Well not every customer, because sometimes a player puts a bid below equilibrium price, but in most cases they are.
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As for auctions: that's why well designed auctions either officially or unofficially implement a rule stating that the increment of a bid should at least be X% of the opening price or Y% of the previous bid. A such rule would encourage people to act now rather than later, analagous like having Z% of inflation encourages people to "use" their money now rather than let it rot in their home.

out of those theoretical 10 people willing to buy between 3,000-50,000. they aren't all going to buy anything below 50k. some of them may have a limit where they are willing to spend 3k, some might be willing to spend 10k, some might be willing to spend 20k, some might be willing to spend 50k. as you get high and higher in person, there will be less people willing to pay that price. just because its listed at 49k doesn't mean all 10 will still buy it. people can always look at the history as well and notice there's a huge price gap between 16.8k and 39k to know they're getting stiffed and will wait for lower prices. Hence why the demand curve is downward sloping.

As long as people can freely adjust prices it can reach equilibrium faster. If there's a tax/limit on price adjustments it'll actually slow the process of reaching equilibrium and cause the market to perform less efficiently and it won't mirror current market prices as well, and cause more price gaps.

Yes auctions create a minimum for incriments, but there are also auctions that don't. people will still do this in those auctions as well because its a waste of time to go back and forth. thats why people will undercut by more than 1 gil, so that way they can drive away more competition so they won't need to check back constantly which will actually save them time, time to make more money.

Not sure where you're getting this 3k per minute figure. I certainly don't make 90k running AK in 30 minutes.

it's an arbitrary thing he came up with to fit his scenario.

[HurtigeKarl]

Not sure where you're getting this 3k per minute figure. I certainly don't make 90k running AK in 30 minutes.

If you are running AK for Philosophy stones, you are not being efficient. Given 37500 gil per 125 tomestones, doing Wanderer's Palace Speed run at 10 minutes (yes full relic, and know how), you would earn 37500*100/(125 *10) gil per minute = 3000 gil per minute.

Also since it wasn't obvious before: the explicit numbers themselves are pretty much irrelevant, I only used numbers matching the tome-runs and HQ 1 star market from a few weeks back to avoid too much mathematical abstraction, since I know that many players in general are not able to handle too much abstraction. I could have done the whole argumentation using no explicit numbers, so please see past the numbers and look at the argument. Don't let the trees stop you from seeing the forest.

out of those theoretical 10 people willing to buy between 3,000-50,000. they aren't all going to buy anything below 50k. some of them may have a limit where they are willing to spend 3k, some might be willing to spend 10k, some might be willing to spend 20k, some might be willing to spend 50k. as you get high and higher in person, there will be less people willing to pay that price. just because its listed at 49k doesn't mean all 10 will still buy it. people can always look at the history as well and notice there's a huge price gap between 16.8k and 39k to know they're getting stiffed and will wait for lower prices. Hence why the demand curve is downward sloping.

Except the situation I describe is precisely the one where during a wide price interval the demand practically doesn't change. I.e. practically a vertical line in the demand curve between the price points price=a gil and price=b gil. Where b > a and (b -a) >> L. L here refers to a width.

How accuretely this describes the real market is of course another matter. What I showed was that given certain assumptions, the 1-gil-undercutting artificially keeps the price above equilibrium price.
That's a problem. One important goal of the market designers should be to design the rules of the market in such way that the equilibrium price is reached sufficiently quickly.

One way, that I mentioned before, to test if the equilibrium price is currently met, is by making a large undercut. If other people follow you and the demand doesn't bounce back to the old prices, it means that the previous price was above equilibrium price. Certain sellers may see this as "crashing the market".

When I can so easily singlehandily "destroy" a market for the sellers by drastically lowering their market margins by doing large undercuts, it means that they were previously artificially attempting to maintain a price that was higher than the equilibrium price. That's a problem from the buyers.

An interesting scenario to keep in mind is that if there only 1-gil undercutters in a market and they all know that 15% of the time they will sell at a profit that gives them 1000% of the profit they would have received if they had sold their at equilbrium price, then they will keep doing the 1-gil undercutting, because on average they earn more by doing fewer sales above equilibrium price than more sales at equilbrium price. This strategy is viable partially because there is no readjusting fee.

As long as people can freely adjust prices it can reach equilibrium faster. If there's a tax/limit on price adjustments it'll actually slow the process of reaching equilibrium and cause the market to perform less efficiently and it won't mirror current market prices as well, and cause more price gaps.

As long as prices can be adjusted freely, there will be more adjustments, but if the size of the adjustments aren't large enough, the travel towards equilibrium per time unit will actually be slower than in the case where they aren't allowed to adjust freely. It is important to realize that many small adjustments do not necessarely added together be larger than one big adjustment.

Furthermore, at the point where adjusting freely becomes faster for the travel towards equilibrium, the price may already be close enough to equilibrium that it doesn't matter so much anymore to travel even closer to equilibrium.

Yes auctions create a minimum for incriments, but there are also auctions that don't. people will still do this in those auctions as well because its a waste of time to go back and forth. thats why people will undercut by more than 1 gil, so that way they can drive away more competition so they won't need to check back constantly which will actually save them time, time to make more money.

Depends on how much they consider their time is worth and how much time an adjustment takes as well as how their strategy reduces the final price at which the item is sold. Also a lot of human psychology involved, some may feel embarrassed by doing small incremements. In an auction there is no really good reason against implementing a such "minimum incremement" rule either officially or unofficially; one unofficial way to do so is to simply not invite the person later for other events.

[Wazabi]

I agree with Ziz that demand is different at different price. As long as demand has a high elasticity to price, there will generally be a higher demand at lower price. Interpreting it at an interval is not very realistic and misleading.
On the freedom to adjust price though, I will have to go with you. You're right that the freedom to adjust price will lead to this 1 gil undercutting which makes the journey to equilibrium slower because the incentives are not there to adjust further down. With restrictions such as tax to adjustments, there is an incentive to post at a lower price that will have a higher probability to sell since you no longer have the freedom to readjust the price freely.

However, this also depends on the size and activity of the market. Given sufficient market participants, prices will hit equilibrium quicker with or without freedom to adjust price. At a large market like this, restricting freedom to adjust price decreases the market efficiency because it introduces another economic phenomena called sticky price. That means that when the equilibrium shifts, it will take longer for the price to adjust to reflect that because there is now a cost associated with price adjustment.

So, I believe your idea would work only in a small market...but not advisable for a large market.

[Kazamoto]

In an market place like we have with FF14, with few market controls. (blind bid/pre-listing fee) you never have to offer your goods at the best price for consumers, only at one lower than your competitors.

[HurtigeKarl]

I agree with Ziz that demand is different at different price. As long as demand has a high elasticity to price, there will generally be a higher demand at lower price. Interpreting it at an interval is not very realistic and misleading.
On the freedom to adjust price though, I will have to go with you. You're right that the freedom to adjust price will lead to this 1 gil undercutting which makes the journey to equilibrium slower because the incentives are not there to adjust further down. With restrictions such as tax to adjustments, there is an incentive to post at a lower price that will have a higher probability to sell since you no longer have the freedom to readjust the price freely.

However, this also depends on the size and activity of the market. Given sufficient market participants, prices will hit equilibrium quicker with or without freedom to adjust price. At a large market like this, restricting freedom to adjust price decreases the market efficiency because it introduces another economic phenomena called sticky price. That means that when the equilibrium shifts, it will take longer for the price to adjust to reflect that because there is now a cost associated with price adjustment.

So, I believe your idea would work only in a small market...but not advisable for a large market.

The price elasticity of demand does not need to be constant, and it does need need to be large on every price interval. That elasticity can theoretically be close to 0 in certain intervals, and the effects of the 1-gil undercutting in such situations is what is being analyzed in the first post of this thread. In which situations can we expect the elasticity to be small? Well, in cases where there are no good substitutes and the necessity is high; such as when a person just hit lv50 in a new crafting class/gathering class and he wants HQ gear for said class.

As for whether or not the market is big enough: assume there are 50 sellers on a market, all of them 1-gil undercutting, while the price is 10k gil above the equilibrium price. Assume that each of the 50 sellers does ten adjustments per day, then it will take at least 10000/(50*10) = 20 days before the equilibrium price is met. Perhaps the markets are not big enough in this game? Now if we had 500 sellers on a market, it would take at least 2 days, and that's a far more reasonable speed. Which do you think reflects FFXIV better? From my experience, the former reflects better.

[Wazabi]

In Marlboro, before I transfer, 1star hq items can be sold for a profit of at least 10k, usually at 15k... That's your way above equilibrium example. In Tonbery, you sell for a profit of 2-3k...both operates with the same market mechanism. So market size plays a huge role here.

The question remains weather the inefficiency caused to the market by restrictions and barriers is worth it or not. In my opinion, no. Artificial control/manipulation of the market is almost always a bad idea in a simple market such as a game market.