An Analogy
A friend of mine plays World of Warcraft, and for a while, took over the market for a particular item in the Warcraft auction house.
Let’s say it was Khorium Ore. Buddy logs in, buys up all the Khorium that’s for sale for less than a certain amount, and then lists it for sale at the higher price.
Every day he does this, so that now he’s effectively re-priced Khorium at the rate he has chosen.
The people mining Khorium are happy – someone is buying all the Khorium they can mine. Buddy’s happy, because he’s making a profit on every sale. It’s everyone else on the server that’s getting ripped off by his activites.
Now, substitute oil for Khorium, speculators for my buddy manipulating prices, and consumers for the people getting ripped off.
Is that what’s going on? And, how does it end?
In Warcraft, it would eventually end because the supply would increase to the point where buddy couldn’t possibly buy it all. But the supply of oil is limited, both artificially (by OPEC) and by the existing capacity to pull the stuff out of the ground.
Either the speculators know something that we don’t – that supply is about to be naturally constrained by a real shortage – or they’re creating a bubble, that will eventually collapse when supply outstrips their ability to buy it.
July 2nd, 2008 at 9:35 am
Actually, in a capitalist system (which the WOW market seems to be) what should happen is that someone else should get it on the same gig as your buddy and compete with him in buying up Khorium. If your friend is making money hand over fist, then surely there’s money to go round to others who want to do the same thing. That would bring down the price of Khorium for consumers, because your friend would have competition and would have to price his goods in consequence.
I guess one way in which WOW does not emulate the real world is that it’s a game, therefore people’s drives are different. Whereas everyone in the real world *has* to care about making money to cover the basics of life (feeding, clothing and sheltering yourself), in a game environment, only those that are intrinsically motivated by making a profit (i.e. the “born merchant”) will truly play out (and advance) a market economy. In other words, unless controlling the world supply of Khorium is really fun for you – more fun than hunting orcs and finding loot – you aren’t going to bother doing it, because the return you get from playing the game is fun, not money. However, in the real world, the return for taking a piece of the oil market can be huge, so lots of people are willing to get in on the action.
On a side note, I think your friend should organize his Khorium enterprise even more. He should start selling shares in the Khorium business -in order to fund Khorium gathering on a massive scale. Maybe I should join WOW just to play around with economic concepts :)
July 2nd, 2008 at 10:22 am
I think you’re right – there are a lot of resources that players need, possibly more unique resources than there are players with the resources to attempt to manipulate the market.
Back to my oil analogy – in the real world something like what you’re suggesting has already happened, in that someone established a trading desk where you can buy futures. That would open up the process of monopolizing an asset to anyone who wanted to play the game, but it doesn’t fundamentally change the game.
So in the real world we’ve got a whole collection of speculators basically making some short term gains at the expense of everyone in the world who buys oil based products, and setting the market up for another big fall in the process. We can see it coming, and we’re probably not going to do anything about it.