So I used to be a pretty big-time player in a couple of games. Not a shark, but a large fish - no one you'd know the name of or anything, but rolling at a level where, say, dropping a few M neopoints on a gift to a new player was NBD.
And Neopets was my drug of choice. I won't say everything I did (or, indeed, most of what I did) was TOS approved. Neopets is a game where, to be frank, hard work won't get you too far until you've got your first million Neopoints put together, and when I was... 14-15, maybe? I bought an account from a guy in college in exchange for writing a paper for his history class the next morning. Stayed up 5 hours researching and writing it, and got a 2 year old account and 3.5 million Neopoints for my trouble.
Now, making money in Neopets is a matter of iron-solid understanding of the Neopian economy. Buying at market-value and selling high is the letter of the day - using refreshing, tracking restocks, and using programs to buy and sell items at tracked values.
By the time I stopped playing Neopets seriously, three years later, I had amassed on my primary account over 126M neopoints in NP and cash-value items like paintbrushes. I sold around half of that for over 300$ cash, used that to finance a trip to DC with my college and some miniatures for D&D, gave ~50 Baby Paint Brushes (worth 595K each) and a couple of rarer PB to the Giving Tree over the course of around a week, and split up the rest between several accounts.
And then I went and got a degree in Business Administration. 5 Econ courses, here I am, because
of course I am.
So, I say all that to establish some cred when I say that, despite having only been playing this game for around a month, I do have some idea what I'm talking about when I discuss game economies. And this is what, over the years, I've learned about undercutting - more as a matter of interest and because it may help people understand where the other side is coming from than because I think it will help change anything:
So, ultimately with any game with a sturdy interplayer economy, there are going to be six key factors influencing the value of any item:
Intrinsic value - the value an item has because of the cost of getting that item. The "base" cost of an item. This includes the material cost of the item, the treasure cost if it's bought in the marketplace, the time cost of brewing it, or the sale value if it's sold directly out of inventory.
Supply - interacts with demand. A high-supply item will have a lower price than a low-supply item if demand is a constant non-infinite.
Demand - interacts with supply. A high-demand item will have a higher price than a low-demand item if supply is a constant non-infinite.
Inflation - how much is a treasure worth? Most easily measured in treasure:gold ratio, but it applies elsewhere. For example, how much does 100 fish points cost on a given day? How much does 100 meat points? How does it peg to items with constant demand and supply?
Time value of money - what can people do with their money if they sell this item now? This effects undercutters most. Someone who is undercutting is trying to get their item sold first - efficiency is valued over maximizing profits. What are they doing with their money that makes it more valuable than treasure?
Spec - what do people think it's worth? What do they think it will be worth? If they think it will be worth a lot, for example a retired item that's popular, they will buy it for a higher price now because they think they can still make a profit on it later. This is, odd as it seems, the opposite of undercutting, and causes price rise in a virtually identical manner.
Now: Undercutting.
The bane of the reseller's existence, the appearance of undercutting is caused by two potential events:
1) a sudden drop-off in demand – the “false undercut”
2) sellers valuing time more than money.
These two instances are frequently, but not always, tied together.
As an example of the first: A limited-edition item is made unavailable. Immediately after, everyone who didn't manage to get it while it was available tries to buy one, so that they get it before the price rises. This, paradoxically, makes the price rise – demand is high and supply is non-infinite, so it goes up as people buy out the cheaper ones and they are replaced at higher prices.
A week later, the price peaks. Most people who wanted one now have one. Demand plummets.
Now, instead of items being sold as fast as they can be listed, only 2-3 per day sell. That means that only the 3 cheapest items in the AH have any chance of selling. It is a seller's only hope to price the item lower than their competitors – and the next seller must do the same, and the next – resulting in a steadily dropping price.
In this case, it is not the fault of the sellers that price is dropping. While this looks a lot like an undercut, it is a function of supply-vs-demand, not a sales tactic, and it's part of an ordinary, healthy economic function.
Now, an example of the second: I have a couple of common familiars. They are worth around 2k each if I sell them through my inventory. If I price them out, they are worth anywhere from 5-7K. The lowest price for a familiar in the AH is 4K.
If I sell from my inventory, I will lose a minimum of 2K per familiar over even the cheapest AH sale. If I price them at 5-7K according to value, I will make more money, and this would seem to be my best bet – ordinarily, this is what I would do.
However! I have just found a great dragon in the AH, and I want to get it! I need ~10k. If I price my familiars at 5-7K, they will be found if someone searches the AH for that familiar – but at 4K, they show up first, and people who are looking for familiars for Baldwin will see them, too. And I need the money now, so I'll knock 200T off to make them more attractive!
Now my 5-7K familiars are selling for 3.8K each – but I'm getting the treasure I need when I need it. I might make 12K, vs 28k if I sold them at full value – but by the time they sold, the dragon might be gone. In economics, this is “Opportunity Cost” - I weigh my options, and in choosing one, give up others. For example, in getting my dragon, I gave up the option to get an extra 16K, or to get metallic mucks from Baldwin, or to get treasure chests from those familiars. You make this judgment every time you buy or sell something in FR, even if you don't think about it.
Now, not everyone needs a particular reason to want money fast. For example, I will nearly always undercut, even if I have money – I'm too impatient, and too used to Neopets, to put up with waiting at a higher price. Some people will always prefer to sell fast and low. We'll call them “Time People.”
On the other hand, some people want to maximize their profits. They're not doing anything with it anyways, so what's wrong with it sitting in the AH for a day or two? They'll wait if it means a few extra K. We'll call them “Money People.”
The thing is, Time People mean that it takes longer for Money People to sell. People buy cheapest-first, so you're gonna be waiting for either a break in Time People stocking stuff up, or a single person or rush of people who need a lot of an item, more than they can get that cheap. A good example is Swipp's items – Money People can sell theirs when Swappers buy all the Time People out and still need more, and they can make a lot of money at it.
Unfortunately, there's not always a lot you can do about it. Fortunately, some things will limit how low a price can go – for example, items will rarely drop significantly below their intrinsic value, although a single seller may go that low if they have a good enough opportunity for the money. And there are situations where an effect like undercutting can be caused by things other than demand drop-off (for example the converse, supply increase) but those aren't necessarily examples of undercutting, merely similar-looking economic shifts.
And lastly: yes, there is such a thing as malicious undercutting. This typically effects a set-priced item, for example a Baby Paint Brush in Neopets, that is used as a means of moving cash and treated as a set value of cash in trades (so no negotiation happens – a 1.3M trade in Neopets could be done as pure NP, 595KNP and a Baby Paint Brush, or two BPB interchangeably with no issue). In one instance, someone bounced the economy by selling BPB for like 300K, and that caused a drop in the value for around a week – this was back in I think '12? - that scared a lot of people who suddenly saw their net worth drop significantly if they had a lot of money in BPB. I lost and regained around 1.5M NP in around 5 days, and I didn't have that many BPB.
Oof. I am sorry about that. It worked out to almost 3 pages in word, so this is gonna be a big one... I just love economics, and love game-economies most of all, and have spent a long time thinking about this and developing my understanding. That said, keep in mind that terminology varies from game to game, and that IANAE (I am not an Economist)...
If anyone finds this interesting enough to care, maybe I'll post some stuff in another thread. War stories or something.
Also, I am a retired gangsta - I play clean nowadays, and have for years, so please don't hassle me over cheating. It was a different game, a different economic setup, and I guarantee you I had next to no interaction with the finances of any player with less than 10M.
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Dragoncatclem
