[Pssst; Hey you! Sorry for the pendantic tone, it's there for my academic friends]
The Stage Setting Phase
Not too far back I realized that I had a temporary need for an hour or two a day of non-productive activity, and so I signed up for a MMORPG. It was amusing for the first two months, it remained fast-paced enough that the repititous nature didn’t bother me.
Finally after the rinse, wash, repeat aspect settled on me, I was ready to quit. By this point however I had amassed a small sum of the servers currency, and decided before I quit I’d try a few experiments. I had earned this small sum, partially through sale of phat loots, and partially through the harvest of raw material resources. Other players bought these resources for their manufacturies and sold finished goods.
All of this took place in the central market/auction house system.
Having worked as a Pricing Analyst in the very recent past, and seeking to re-enter this abstract profession in the near future, it came to me to take this opportunity to try some things which I lacked the ability to experiment with in the external world. Namely the day-to-day market for two classes of raw material were less, in total value, than the amount of currency I had amassed.
This meant I could experiment with the pricing of a market, not just my own produce. I proceeded to pick a few subclasses of one of the raw materials to start with and bought all of the items available. I didn’t start by buying all of the subclasses I could as, in traditional economic theory, my actions in any one could result in a flood of supply in reaction to my increasing demand.
Once I had so-called, cornered the market, I re-listed the all the materials I had purchased at a higher, though not absurd price. Cornering the market, when literally anyone can be a supplier, isn’t as easy as it is in the real world, what with its finite number of suppliers or seasonal supplies.
I had to continually buy any new product that entered the market, but only if they didn’t match my current pricing. If they matched my pricing, we both made off better than other sellers did before, as both our sets of product had proportionally equal chances of selling. Still, though a zero-sum game, since the consumers paid higher prices.
If I had only been able to increase the price a little, I would have lost many of my stacks of currency, as I had to buy much more than I could sell, though I kept it all listed for sale. Instead, over the course of two weeks I sucessively entered into half of the subclasses of the two sets of raw materials I had some knowledge of from my previous harvesting experiences. In generic terms, my level of currency at the outset was 200 units, by the end of two weeks I had amassed nearly 1200 units of currency.
What I did in each of these cases wasn’t merely cornering the market and profiting off of that, though certainly that was part of it. If that had been the only thing, then most likely enough new suppliers would have entered a newly profitable market to drive my profits to losses. What I had also achieved was the destruction of a set of information that did not allow me to profit more than normal, and then I re-introduced a new set of information that did allow me to profit, and profit heavily (a ~5.7 fold increase in a few weeks).
There were two types of responses to this that occurred in the weeks after I suspended my operations. Firstly, before I had even discontinued my operations, I found that others players in the market had witnessed my manipulations, and then proceeded to copy them. This even ocurred in goods which I had not transacted. Since this occurred without any communication other than watching the public pricing and sales in the marketplace no collusion was necessary for this, sellers side, mutually beneficial simulitude. Secondly, after I no longer defended the pricing structure I had artificially imposed, one third to one half of the subsets of raw materials persisted in having the same pricing structure I had imposed for a short time. One half to two thirds of the subclasses returned to their previous levels. I will explain the implications of each now.
Goods Which Maintained my Artifically Imposed Pricing Structure
Since there was no need for explicit collusion on my part and the part of others, I had managed to single-handedly shift the pricing structure of several sets of goods without secret communication, and the market would persist in this. For these goods future manipulations on my part would not have an abnormally high profit, and would settle into what economists refer to as normal profits. Indeed after my initial manipulations, my ability to generate multiples, instead of percentages, in increases went away.
Because the new pricing structure persisted in several classes of goods for a noticeably long period of time, I had shifted the pricing structure this without inherently changing the dynamics of supply and demand. This is difficult to reconcile with my training in classical economics. If the supply had gone up considerably in the face of my excessively increased new pricing, I would not have had the financial capital to persist. On the other hand it was very unlikely that demand for these products produced from these raw materials had shifted much as there was not a sudden influx of players buying goods at this time. In effect I had changed the pricing structure on several subsets of raw materials, by changing only the available information. The underlying supply and demand had not shifted noticeably.
Goods Which Reverted to Prior Price Levels
The products which reverted back to their original pricing were the most intriguing. Had I wished to persist in paying actual money for the monthly subscription, I would have waited a few weeks and then repeated the original process. It is possible that I could have used this method over, and over, to generate substantial amounts of game currency.
This experiment netted me about 5.7 times the amount of funds that I started with. If I had not amassed enough currency to dominate a few sections of each market, I never would have had an impact. Once I had a large enough amount, I was able to multiply my investment, not simply increase or incrementally compound my investment. This was achieved through the manipulation of available information.
This experiment has helped me understand pricing in software and ebooks better. If the market for your product is bi-modal, with mostly those willing to pay a lot and those willing to pay nothing or a little, then you may as well only price for the high end. Pricing in the middle will not net you higher profits, it still won’t move the lower tier to purchase. You also do not have to provide support to the lower tier. [You may as well let them pirate your product, maybe they'll eventually transition to the other end, think of the transition from photoshop 4chan kids who grow up to be professional graphic designers. Also, in my experience they do not teach the possibility of bi-modal consumer distributions in econ classes.]
Caveat: This was an established game server with many veteran players, so it is possible that the number of possible suppliers was limited to a trickle of new players and veterans making second characters. These veterans may also have had enough currency saved up to by any raw materials at even absurd prices. This, however, was not evident in the sort of inflationary prices which theoretically should come with it. Basically if suppliers were limited and consumers had huge pools of currency, theory suggests the prices should already have gone up to a point where I would not have been able to profit in the way I did.
In Economics Terms: I had increased the price of almost all items by a minimum of 10 times their previous price. Suppliers of items were not sensitive to price, the price elasticity of supply was very low. If they had been more sensitive to price, given an infinite potential for harvesting, they would have drowned out my effect and undercut me. Consumers of items were also not sensitive to price, or I would have sold so few that my transaction costs for posting items for sale would have eventually eaten up the profits from meager sales, the demand was price inelastic.
A note on ethical considerations: In the game I had two characters and played on what is known as a role playing server. This meant my character was supposed to adopt the traits, mannerisms and habits of the species I had choosen. In this case I had choosen a species that was supposed to seek profits, manipulations and secret hand shake deals to get ahead. I also had an alternate character that the first recruited, the second characters species was one that sought any opportunity to gain power. Both of these world views would see the price setting actions and manipulations as appropriate. In the real world I would never undertake such manipulations, as I see them as unethical in our world. In the context of the game I was able to meet my characters ideals, and run an experiment which my real-world self could appreciate.
PS, you should hire me. Here’s My Resume