WoWconomics: Auction Theory

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!

Nick Hakun

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2 thoughts on “WoWconomics: Auction Theory”

  1. I agree that your questions would prove to be a strong basis for research because you just never can tell what any outcome may be! Like professor says in class all of the time, when describing humans, the word rational should be put in heavy quotes. No one can really truly predict what decision another will make. That being said, it is very hard to say whether ot not the average prices of an item would rise, fall, or stay the same if a market changed its mentality.

    From recent experience of auctioning for several different products on ebay I think it would be good to look at the particular market and assess the auctioning activity as a whole: what prices do the seller’s start the bids at, is there a reserve limit, do people just use ‘buy now’ options etc. How much demand is there for the items?

    From there it I auctioned for an iphone and a hair curler. Even though both items were for completely different uses, I was purely looking for a bargain in both cases. I had my own personal limit/ budget that I wanted to spend on each item and proceeded. I know that if I wasn’t a broke college kid I would have simply bought the iphone right there and then without waiting, because of the type of device that it is. But, with the hair curler, I was perfectly fine with placing bids and would have continued to place bids even if I did have enough for the ‘buy now’ option.

    That being said, in the case of the smartphone market, because of the demand for the phones, prices are much higher. So if the mentality of the auctioners changed I think prices would go down- however, because of the technological age in which we live in, I find this highly unlikely.

  2. I think that if the buyer behavior shifted to purely bidding over buying now, prices would initially drop. I think this would be the case because there is no longer the additional value of having the item instantly. However, I think that prices would gradually creep back upwards to where they were before as the new time frame becomes normalized. I haven’t [played in about 5 years, but I used to be very involved in the auction house. There were many add-ons that could track prices within and across servers, comparing the average values with the ones given. I think because of the presence of abilities like these and the typical price stickiness, that prices would go back to regular levels. They may stay permanently lower for items that are relatively abundant to gather and the reason for auctioning was primarily convenience and not necessity, but for anything that would take more than an hours worth of effort to acquire outside of the Auction house, I don’t see the absence of a buy now having much effect on the pricing long term.

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