[MUD-Dev] Economic model..

Brian Thyer brian at thyer.net
Thu Feb 26 20:18:11 New Zealand Daylight Time 2004

On Wednesday, February 25, 2004 5:26 AM,
Daniel.Harman at barclayscapital.com wrote:

> What is the issue with arb? Real markets have plenty of it, and
> its one of the mechanisms that keeps the markets efficient. The
> only possible problem I could see is if people can buy enough of a
> resource to control the prices on it. If that's the case though,
> then two things may happen :

>   - No one buys the product.

>   - Someone else undercuts because the margin is great enough for
>   it to be worthwhile.  >

In general a certain amount of arbitrage isn't a bad things.  Let's
say I live in Chicago and I'm on vacation in Iowa where I see some
corn for sale off the back of some farmer's truck for $0.50 per
bushel.  I happen to know a thing or two and I know that I can get
$1.50 per bushel for that in Chicago.  I buy up a few bushels, not a
lot, just as much as I can transport, take it over to Chicago and
sell it for $1.50.  I've made myself a nice little profit here.

First problem, the farmer sees none of that.  Sure he sees the 50
cents per bushel that I paid him, but none of the extra.  Some would
say that he doesn't disserve it because it's what I earned for
transporting and selling it, I don't agree, but that may be more of
a moral issue.

If it stays at this, the occasional bushel of corn coming in selling
at $1.50, that's fine.  But you risk a few things.  First, let's say
that the corn already for sale in Chicago is only $1, but it's a
lower quality.  So people rush to buy *my* Iowa corn because, while
it costs more, it's a higher quality.  Now I've reduced the demand
on the other corn in the area.  Their reaction?  To try to grow
better corn to sell.  Soon I'll have to find better corn to compete,
and soon we'll have an inflationary war going on trying to out due
each other's better corn, leaving no simpler cheaper corn.

Another problem could be, and will be, the opposite.  Eventually
corn will be even in quality.  The corn I import and the corn made
locally.  So now the prices will drop.  They'll keep dropping until,
in order to compete, the local Corn farmers are selling corn at the
lowest possible cost, instead of where they were.  In other words,
they're breaking even.  I've just ruined the profit these local
farmers were seeing.

Maybe with just 1 seller of a few bushels here and there won't upset
the balance of things in Chicago's corn market.  Maybe it will, hard
to say.  My advisor used to say that "God made economists to make
the weather men look good".  Point being that you can't *stop*
arbitrage, nor should you want to.  But you *can* help to decrease
it from becoming a rampant problem.

> In Everquest, players moan about traders who buy up items
> immediately from impatient sellers at a discount and then put them
> back on the market for more. Is this more what you are referring
> to?  If so I don't even see that as proper arb, its simply taking
> a position on the market.

This isn't arbitrage.  It's hard to find a good example of arbitrage
in Everquest..but take this for example.  I've got an even faction
with two different vendors.  I find that I can buy item_a from
vendor_01 for 15 plat, and I can sell item_a to vendor_02 for 20
plat.  *This* is arbitrage.  Technically the two vendors should have
an identical price value for the item because the item is of
identical worth to them.  However, for whatever reason, they don't,
so I'm taking advantage of this imperfection in the market.

> Personally I'd love games to setup markets that took a few lessons
> from the real world markets, and facilitated more complex trading
> strategies. Its would add an interesting axis of entertainment to
> the game.

I agree!

- Brian
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