Your favorite segment is BACK for round 2, and this week we will be examining Auction theory as applied in World of Warcraft.
Before we get started, let me explain briefly the type of Auction that is used in World of Warcraft. In this game there is a location in the world where there exists an Auction House. A player must go to that location to use the services. Here over 100,000 auctions are up (usually) and players can purchase goods posted by other players. All auctions are English style ascending auctions with the option for a buy out price. This addition of a buy out price adds a very interesting element to the AH. Most players do not bid on items, and instead simply purchase an item via buyout to save time. There is a small transaction fee on both sides which we will consider negligible.
Now that we are all on the same page, lets look at the literature. My source article can be found here. The basis of this paper is discussing whether or not World of Warcraft can be used as a testing ground for economic experiments based on whether or not players in this game value the in-game currency. The paper concludes that in fact, players do value this currency in a way that is very comparable to how people value real currency, and therefore, this game can be used as the basis for economic experimentation.
How do we add Auction Theory into this? Well, it’s hard. This paper concludes, accurately in my opinion, that the vast majority of auctions posted in the Auction House (96%) are sold via buyout, and therefore, Auction Theory cannot apply. However, that does leave 4% of auctions that then do rely on Auction theory. These items most likely are the rarest and, therefore, hardest to reasonably price items in the game. Rare weapons and creatures that are found with the same probability as a meteor hitting Earth. These items are forced into the realm of Auction Theory. What this paper concludes is that since the players value their currency in a way that is comparable to real currencies, they will follow the rational approach of Auction Theory, that is, playing their optimal strategies.
This paper does not give specific examples of auctions happening in the game, but simply describe the setting and empirically solve, through other methods, that Gold in World of Warcraft is valued identically to the Dollar. This concept opens the door to further experimentation, like for example, what would happen if all of the sellers in a given market would forgo the buyout price and instead let real auction theory take over the vast majority of the market? This paper explained that there was a strong opportunity cost for players, in that they would rather spend extra money to have the item NOW and move on with their day than bid and wait for up to 48 hours. But, if the market changed its mentality as a collective, would the average prices of items rise, fall, or stay the same? I propose this to be a strong area of research.
Comment below if you have any other thoughts!