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The RuneScape Market Crash of 2007 - Setting the Stage for the Crash The RuneScape Market Crash of 2007 - Surviving and Even Benefitting from the Crash

The problems identified in the prior topic created an economy with many structural weaknesses. The status quo was maintained for a long time, because no big changes were being made to the game and its economy. However, Jagex recently did start making enormous modifications to basic aspects of gameplay, which have led to a cascade reaction (and over-reaction); these have served as the proverbial match that ignites a pile of accumulated fuel.

Since the price declines have been most noticeable since the Grand Exchange was released, many folks are quick to claim that the GE is causing the crash. The truth is that while the GE was one of the triggers of the deflation, it was definitely not the only one. More importantly, a lot of what we’re seeing is actually a result of group psychology and not game features at all.

Jagex’s ham-handed duel arena changes wiped out an entire segment of the game of RuneScape in a single day: staking went from a big part of the economy to nothing instantly. Stakers were responsible for much of the demand for several high-end goods, such as food, potions, rune knives and enchanted bolts; with staking killed off, demand for these and other items dropped off as well. The lack of recent compelling high-level updates meant little alternative for sellers to turn to.

Of course, there were ripple effects here too. If enchanted bolts are in less demand their price goes down, which forces down the prices of bars and gems. When bars go down in price, so usually do ores, and so forth.

Another ripple effect has to do with players. With staking removed, a lot of players simply quit the game, reducing demand for a wide variety of products. Many others turned to skilling and power-leveling since they couldn’t stake, which exacerbated the problem of too much production, making the supply glut even worse.

The Grand Exchange and the tying of market prices to RuneScape shops also impacted how a lot of merchants play the game. Many of them also either quit or starting churning out unwanted goods.

You knew this would be in here somewhere. J Yes, the Grand Exchange is part of the problem, because it (theoretically) provides the efficient marketplace that was never before in the game. Instead of having to try to sell their excess product on the forums or in World 2, players can now “dump” it on the GE, and many people tried to do exactly that, creating a tremendous “overhang” of supply in the market.

It’s important to note, though, that this is not because the Grand Exchange is a bad feature! The GE is a good idea (if poorly implemented). It is simply allowing us to see more readily a problem that was always present but just hidden: too much supply of basic goods in the game because of the need to use them for leveling.

Many people (including myself) expected everyone to run to the GE to dump their goods when it was released, leading to a temporary drop in most prices. What I didn’t expect is that Jagex would decide to try to play God with the marketplace by imposing strict price controls. The reasons stated for this were to prevent price manipulation and ensure market stability. The former goal has been met, but the latter really has not.

Now, it would seem that price controls could hardly be to blame for the current crash. I mean, without them, prices would have dropped much faster and gone even further, right? Not necessarily. While this sort of speculation is always difficult, I believe a good case can be made that the price controls have made the crash worse. The 5% limits cause necessary price corrections (due to excess supply) to be dragged out, creating the following issues:

• The price controls confuse people about the true state of the market, making it difficult for them to know what real prices are for goods outside the GE. This leads to people being hesitant about buying.
  
  
• The slow motion decline has given more people time to notice what is happening and decide to “sell before prices drop further”. This contributes to the panic and herd mentality driving prices down.
  
  
• A quick, sharp drop in prices would have deterred many sellers from trying to sell, but now that they have entered the water, most want to move their goods. As a result, there are more sellers compounding the problem than there might have been otherwise.
  
  
• What normally corrects price drops is bargain hunting: buyers who jump in to buy items that have been oversold. In a normal market the draw of such bargains is very great, due to the sharp declines that occur in an oversupplied market. Here, the price limits reduce the incentive for buyers to come in and rebalance the market, because they too see prices going down every day and most figure they are better off to wait.Sellers are unable to move their goods because prices on the GE don’t drop as fast as outside it, and watching the prices go down day after day increases feelings of panic. This leads to frustration and contributes to irrational “dumping”.

Before the Grand Exchange, there were many F2P items that sold for more in P2P worlds than F2P worlds, and a smaller number that were the opposite way. The GE integrated these markets, with the net result usually being downward pressure on prices of F2P items, due to the large number of F2P players and their inability to use other markets like the forums.

While early selling imbalances may have been due to players clearing stockpiles of goods, as prices have gone down for many days, a panic mentality has clearly set in. Many players have lost confidence in the market, and some are worried that it will completely collapse. I don’t see this in all markets, but it’s clearly present in some of them, especially food and potions.

I watched last night as herblorists competed with each other to sell potions for what were eventually prices so low as to be ridiculous. In many cases, players were losing millions or even tens of millions compared to what they paid for herbs and secondary ingredients, but acted grateful that they could sell at any price at all (see Figure 58, for example).

Of course, a selling panic is a vicious circle. The more that people panic, the lower prices go, and the lower prices go, the more people panic figuring they “better sell before prices go even lower”. This is a core part of the problem right now.

When markets are suffering from steep declines, panic selling, worries about collapse and a clear loss of confidence, reassurances from those in charge can make a big difference. For example, after the Black Monday stock market crash in 1987, comments from then new Federal Reserve chair Alan Greenspan are widely credited with soothing worried investors and preventing the problem from becoming worse. Some go so far as to credit Greenspan with halting the declines and allowing the market to subsequently recover.

In contrast, Jagex sprung the Grand Exchange on RuneScape players a full 10 days ago and has been the collective, proverbial invisible man ever since. While the markets twist in the wind, the company has been completely mum on its plans for the GE, and also has had nothing to do say in terms of upcoming features that might stem the downward tide. Did the Gowers and their top advisors not consider just how powerful even a few calming words could be in the current situation?

The RuneScape Market Crash of 2007 - Setting the Stage for the Crash The RuneScape Market Crash of 2007 - Surviving and Even Benefitting from the Crash