TruthScape.com  9  TruthScape Sneak Previews - Analysis of Upcoming RuneScape Features and Updates       9  TruthScape Sneak Previews - Why the Grand Exchange Could be RuneScape’s Most Important Update in Years

Preview of The Grand Exchange - Does Jagex Learn From Its Mistakes? My Concerns Over Potential Abuses Preview of The Grand Exchange - The Bottom Line - It’s All Good (Mostly)

Whenever Jagex makes changes to important workings of RuneScape, such as introducing new skills or items, changing shop prices and so forth, it happens again. Every time, without fail. Out of the woodwork pours an army of Chicken Littles, flapping their wings and sending feathers flying as they announce to everyone that The End Is Nigh. “The economy’s going to crash! The economy’s going to crash! Run for your lives! Bawwwwwwwwwwwwwwk!” And with the Grand Exchange being such a big update and one so closely involving trading and the economy, the hysteria this time is even worse than normal.

Groan.

Let’s put this nonsense to rest, once and for all, shall we?

The first thing you need to remember is that these dire predictions have been made innumerable times in the past, and they have been false every single time. Hundreds of people have said the economy would crash over the course of several years, and hundreds of people have been absolutely wrong.

The second thing to keep in mind is that the people who are making these dire predictions have absolutely no understanding of markets, finance or economics. How can you tell that someone is commenting on the economy without really understanding it? Well, the first hint is that they say the economy is going to crash. J

Seriously, though, the folks who end up at this silly conclusion do so because they look at a situation and assume an initial reaction, but fail to take into account the natural adjustments and corrections that occur automatically in any economy. They also don’t understand that the sort of exchange that is being created here is really almost identical in concept to thousands of real world stock, commodity and other exchanges all around the globe.

Here’s an example of this sort of invalid “analysis” that I saw on a forum recently. Someone claimed that people would start selling goods but would notice that there were other people also selling, so they’d lower their price to compete. Then other people would see that lower price and would lower theirs further, and so on, causing the prices to free-fall. The whole market would be flooded with items at cheaper and cheaper prices until the whole thing collapsed! Oh my!

Well, that’s a nice doom-and-gloom fantasy scenario, but real markets do not work that way. The main reason is that most of the time, people are not idiotic lemmings who will all follow each other off a cliff. They will respond to changes in a way that reflects their own rational self-interest.

What governs this response is an economic principle called price elasticity. In simple terms, price elasticity measures how quickly, and to what degree, people react to changes in prices. The price elasticity of demand tells us how much more people will want to buy things when the price goes down, and how much less they’ll want them when the price goes up. Conversely, the price elasticity of supply indicates how much more sellers will be interested in selling items when the price increases, or less interested when prices go down.

In a scenario where many sellers want to all sell the same item, they don’t all just keep lowering the price until the market collapses. What happens is that at first there are more sellers than buyers at a particular price. When the sellers see that they cannot sell at the current price, some of them will offer at a lower price. This will result in certain buyers taking that price, resulting in exchanges and setting a new market price. This may happen several more times, the price dropping each time until a level is reached that interests a good number of buyers.

Now, each time the price goes down, some sellers will simply not be interested in selling for the lower current price. They will just decide not to sell, or to find another market to sell in. Conversely, the lower price will attract more buyers into the market, in some cases because people will find new uses for items that were not practical at the higher level. As more buyers come in and more sellers leave, a new equilibrium of supply and demand will be reached. The price will be different at this new equilibrium, but the market will remain completely “uncrashed”.

The exact opposite occurs when prices start to rise. Buyers become less interested in buying, while sellers suddenly appear out of nowhere to sell at the higher price.

In RuneScape, another factor is that prices influence what people spend time doing. If a resource is cheap, more people engage in activities that use that resource, which increases demand and eventually increases the price (except for store-fixed items, which violate free market principles, but those are only meaningful in a few cases.) On the other hand, if something is worth a lot, people spend more time getting it, which increases supply and drops the price. In both cases, the tendency is to move towards equilibrium, not a “crash”.

There are countless examples of these market mechanisms in action all the time in RuneScape. Remember when dragon boots were released? At first they cost millions each, but the price dropped and dropped as more and more came into the game. And some people said the price would collapse down to nearly nothing. But that never happened, did it?

Of course not. The price was initially high because it was a new item and there were few around. The high price acted as a big incentive for high-level Slayers to go kill spiritual mages to get the boots. As hundreds of people did this they brought thousands of the boots into the game, which filled the demand and caused the price to drop. The price continued to lower until most of the people killing to get the boots realized it wasn’t worth their time any more, and they moved on to other things. This caused supply to go down and the price to stabilize, or at least to only slowly drift downward instead of dropping quickly.

The same has occurred on the demand side many times. For the first several months that Hunter had been out, red chinchompas sold for only around 200 to 300 each, because few people really found any particularly good use for them. Then someone discovered how they could be used for power-training Ranged in a way far faster than anything else, especially at that low price. As word of this spread, rangers started buying up red chins by the thousands, quickly exhausting available supplies. This lead to higher prices, which lowered demand, while simultaneously prompting more Hunters to go back and catch more. And again, a new equilibrium was reached.

There’s not much I can say with certainty about the new Grand Exchange and the effects it will have, but this much I can say:

There.

Will.

Be.

No.

Crash.

So stop worrying. J

Preview of The Grand Exchange - Does Jagex Learn From Its Mistakes? My Concerns Over Potential Abuses Preview of The Grand Exchange - The Bottom Line - It’s All Good (Mostly)