TruthScape.com - The TruthScape Soapbox - Issue #3 - Sorry, Comrade, but Price Controls Don’t Work

Today Jagex released the Grand Exchange (GE), a new method of buying and selling RuneScape items that was much anticipated by many players. I plan to write a full report on the exchange, but have decided that I should wait until later this week to publish it. There are two main reasons for this. First, I want to wait until the usual initial period of excitement settles down, so I can observe the price changing mechanisms in the GE in action. Second, I anticipate that the GE will be the subject of a fair bit of tweaking by Jagex over the next few days.

What I want to talk about now, though, is one aspect of the new exchange that I find rather disappointing. This has nothing to do with the exchange itself, really; it’s not about its mechanisms or how it works. Rather, it has to do with Jagex’s questionable decision to use the GE to implement controls on the RuneScape market. While I can understand that there are valid reasons for trying to limit the freedom of the marketplace in the game, I think that the effort being made here largely limits the effectiveness of the Grand Exchange, and will create more problems than it solves.

The idea behind the Grand Exchange is excellent: an efficient marketplace where you can list offers to buy or sell items, with the game taking care of the transaction for you automatically. In my tests, I found that the GE is a superb way of buying certain less common items that are difficult to find using conventional trading means. It also lets you easily sell a large number of a particular type of item to many buyers, or buy a large quantity from many sellers, without the need for world hopping or many trades.

Unfortunately, though, I’ve only actually been able to buy and sell about 10-15% of the items I wanted to trade. The other items I have had listed with buy or sell offers for many hours, but no transactions ever take place.

I’ve had these calquat tree seeds on the GE, offered at the lowest possible price, for hours. The trading range hasn’t budged, so I simply cannot sell them. Not much of a marketplace.

The reason for this is not a flaw in the Grand Exchange, but rather with Jagex’s decision to implement price controls within the GE. Simply put, Jagex maintains “market price” levels for all items, and will not allow you to buy or sell for any price that is less than 5% below that price, or more than 5% above it.

To realize why this is a problem, you need to understand that the law of supply and demand is the fundamental guiding force of open markets. Simply put, it says that the price of an item is dictated by how many people want it (demand) and how many people have it for sale (supply). A free market is naturally self-correcting: if there are too many buyers and not enough sellers, the buyers will compete with each other, increasing prices until some buyers bow out or more sellers are enticed to sell. Similarly, a surfeit of sellers compared to buyers will force prices down until supply and demand are again in equilibrium.

The market forces surrounding supply and demand are all based on principles of rational self-interest: traders will act and react to market conditions based on what makes the most financial sense for themselves. The problems come into play when governments—in this case, Jagex—decide to interfere with the system, by restricting the prices people can set for buying and selling. When this is done, it ruins the natural ability of the market to compensate for supply and demand imbalances. Rather than trade for prices they consider unacceptable, buyers and sellers will just sit on the sidelines, and the result is either too many items for sale with no buyers, or an excess of offers for purchase with no sellers.

You can restrict the market but you cannot take away the fundamentals of supply and demand without consequences. And this is what we are seeing on the Grand Exchange right now.

What Jagex has done with the Grand Exchange is to follow in the footsteps of many similar failed policies that have been implemented throughout history. One good example would be the year 1973, which saw America in the throes of its first oil crisis. During the Cold War, Americans had always looked down on their Soviet rivals for the well-known shortages and bread lines of the U.S.S.R., but they now found themselves in their own equivalent: cars lining up to buy gasoline.

What caused this situation to occur? It is true that actions by oil producers caused significant increases in the cost of gasoline, but would higher prices necessarily lead to a shortage? On the contrary—supply and demand says that high prices will encourage supply and reduce demand, both tending to counteract a shortage. So what caused the shortages to occur?

The answer is simple: price controls. The U.S. Federal Government, in an effort to “protect” its citizens, decided to cap the price of gasoline. Retailers were put in a position where the price of their product was increasing but the price they were allowed to charge could not. Therefore, they did the only thing that made sense at the time: they stopped buying more gasoline to replace what they sold, and shortages ensued.

There have been many other, similar examples of this phenomenon going back to ancient times. And it seems, in modern times as well.

Many people who have used the Grand Exchange here on its first day have also noticed that many items simply are not selling. Some have surmised that this is not because of the price restrictions, but rather because there are “too many sellers”. Alternately, some say that the items aren’t selling because “nobody wants them”.

These comments really miss the entire point of how markets work, unfortunately; they indicate a lack of understanding of supply and demand principles. Yes, it’s true that there are many people trying to “clean out their banks” right now using the GE. It’s also true that some of these items are likely not the sorts of items that are in high demand. However, neither of these issues—many sellers nor less desirable items—would stop transactions from taking place in a truly free market.

Let’s deal first with the claim that items don’t sell because “nobody wants them”. This is flatly false; unless an item is completely useless and has no value, it will have buyers, if the appropriate price can be reached that the buyers want to pay. So it’s not correct to say that they don’t sell because nobody wants them, but rather that they don’t sell because nobody wants them at the current, restricted price. If the price dropped, they would sell; there would be lots of buyers at a price that’s attractive.

Now for the matter of “too many sellers”. If that’s the case, then what should normally happen in a free market is that the sellers will compete with each other, undercutting prices until they drop to near where the buyers want to purchase. The lower prices will naturally then discourage sellers from selling, while simultaneously encouraging buyers to jump into the market to buy the resources at a good price.

What price controls do is to circumvent these automatic correction systems. Since the price cannot drop below a certain level, buyers will never be interested in purchasing. At the same time, sellers see a sale price that entices them, so they add more and more sale offers, worsening the imbalance.

This is happening all over the game right now with the Grand Exchange. On the one extreme, there are ridiculous cases of prices that Jagex has set that are nowhere near the true market value (dragon shield left half for 700k anyone?) which means the GE cannot be used at all for sales of those items. On the other, there are many items where some goods are selling but not in high volume. This leaves many people unable to sell large quantities of goods, even though they might be willing to take a lower price if that were possible.

Any sort of price control policy will always have negative consequences, the extent of which usually depends on how restrictive the policy is. The worst type of price control is one where the price is fixed and doesn’t change at all; mercifully, Jagex has not gone that route. The company has said that they intend for players to set prices, and that there’s a system in place that will adjust prices “regularly” to compensate for imbalances of supply and demand. This sounds good, but there are two basic problems with how it is currently implemented: the trading ranges are too narrow, and the system is unresponsive.

The Grand Exchange restricts trades to 95% to 105% of the designated “average market price” of items; for example, if an item’s average price is 10k, you can buy or sell it for anywhere from 9.5k to 10.5k, but not outside that range. The first problem is that the trading range is based on a flat percentage that applies to every item; some goods naturally trade in a tight range like this, but others tend to have much larger natural swings in price. The items that normally would fluctuate in price greatly will cause problems for those who want to use the GE.

Another issue is that the GE’s restrictions don’t take into account how motivated a buyer or a seller is. If I’m just cleaning junk out of my bank, I probably don’t care if it takes me a few days to sell something, but what if I really need cash right now? What’s wrong with me deciding I want to sell something at 10% or 20% below market to get rid of it? The same goes for buying—if I died and lost my Guthans warspear, do I want to wait for days until I can purchase one because of artificial price restrictions?

Yes, I can use other methods of trading, but that’s exactly the point—the usefulness of the GE has been greatly reduced by these artificial barriers. The +/- 5% trading range is simply too narrow to properly match the natural variations in any market, and for certain items in particular.

Jagex is going to adjust prices based on how many people buy and sell and at which ends of the trading range, and this would seem to be designed to deal with any imbalances of supply and demand that might occur as a result of the trading ranges. But this brings us to the next problem: how frequently will this be done? In its Knowledge Base, Jagex says that “the market value of an item is automatically recalculated roughly once per day.” It is my belief that this is simply too slow for most items, especially given Jagex’s initial price guesses, which are way off base for hundreds of goods; it will take many days for these items to even approach their true market prices.

The ability to check the costs of common items is nice, but these rune prices haven’t changed since the first time I logged in after the update this morning. Bloods have been at 450 each or less on the RuneScape forums for months, so why set them at a price of 508, and then leave them not updated?

Sure, some items, especially resources or equipment that has been in the game for some time, stay at roughly the same price and change little. But others are quite different. Consider what happens to the prices of new items that enter the game. I can remember merchanting godswords, for example, and seeing the prices go up or down by as much as 10-20% in a single day, and sometimes more. What’s going to happen with a marketplace where prices on these items can only change by 5% once a day?

The same issue comes up with items where new uses are discovered. For example, some folks remember that for the first few months that Hunter was out, red chinchompas sold in the 200-300 gold range, until someone found out a way to powertrain using them, when they shot up to 700 each. The GE seems incapable of handling these situations.

The slowness of updates only serves to slow down the exchange of items, which is the opposite of what the GE is supposed to do.

Jagex has said that it implemented its plus-or-minus 5% price ranges to “create a stable economy that cannot be abused by players who seek to manipulate prices to the disadvantage of others.” Very noble. Unfortunately, as is so often the case, I must once again point out that the road to hell is paved with good intentions.

The first question I have to ask is, simply, who said the economy needed Jagex’s heavy-handed tactics in order to remain stable? It was never unstable in the first place. Sure, many items go down in price as more of them come into the game, and rare items go up in price because they are discontinued, but these are exceptions, not the rule, and the GE couldn’t change this anyway. If the economy were left alone it wouldn’t need to be stablized; it would do that on its own.

Instead, we now have a situation where the GE is likely to destabilize the economy. Because of the tight trading ranges on items, and the low frequency of updates, there are huge discrepancies building up between sale and purchase offers on the GE. Every time prices change, this will result in a flurry of transactions, causing ripple effects in the market. So what is really being gained?

Second, who says that selling at prices more than 5% above or below the “average price” of an item is “taking advantage of others”? I frequently sell items cheap if I just want to get rid of them, and I don’t mind, so why does Jagex? Similarly, if I’m in a rush for something, I’m okay with paying more, so what’s the problem? The same issue applies to buying or selling small numbers of items, where prices often vary greatly.

Price controls can work in the short run, but not only do they have adverse effects, they are usually ineffective. The law of supply and demand represents the free choices of buyers and sellers; price controls interfere with these choices and hence represent an attempt to control not only prices but people as well. Most people do not like being controlled, so the inevitable result of tinkering with one market is that people seek out alternatives, much as water takes the path of least resistance in flowing across a landscape.

The most extreme case is when the government prohibits an item from sale, in which case a black market will appear to meet demand. Here in RuneScape nothing so dramatic is necessary, because there are still many legitimate marketplaces that exist today as they did yesterday, before the Grand Exchange existed. These include the RuneScape forums, third party forums, and in-person trading zones within the game such as World 2 Falador.

Of course, it’s not bad that we have different options; that’s not my point. Rather, what I am getting at is that by making the GE overly restrictive, Jagex is not going to prevent people from buying and selling outside its idyllic “trade ranges”, it is just going to force buyers and sellers to trade in other marketplaces. I consider this a shame, because it greatly reduces the usability of the GE for everyone.

Another related issue is merchanting. Part of Jagex’s motivation in setting up strict trading ranges seems to be to prevent merchants from buying up items at low prices and then selling them for higher prices. Here again, though, the restrictions don’t stop this from happening, because of the existence of other markets. Where before merchants might have taken advantage of price differences between F2P and P2P, or between World 2 and the forums, they will now exploit the flaws in the GE. They can simply look for items on the GE with prices that are artificially too low or too high, and then engage in arbitrage using other markets.

This is going to be especially problematic with items that change value quickly, due to how slow prices update. Merchants can scan the exchange for items that are underpriced and put in huge buy orders to sop up any sellers that arrive, then sell them for higher prices elsewhere. And the opposite is true for items that are priced too high.

In other words, the GE and its limits don’t make merchanting more difficult, they make it easier. In a case of high irony, Jagex has made this situation worse by trying to stop it, because if the market were truly free and open, there would be fewer opportunities for arbitrage.

As usually occurs with market intervention, the ones who are really hurt are the ones who are restricted from trade. I can’t use the GE to sell items so I must resort to older, slower methods. Alternately, I am forced to sell for prices too low or buy at prices too high, all because of a fear of letting the market do what it does best: set its own prices.

My overall problem with the Grand Exchange is that I really like it. Huh? What I mean is this: if the feature was a lousy one, I wouldn’t care about the annoying price controls, because I wouldn’t use the GE anyway. It is precisely because the GE has such potential to revolutionize trade within RuneScape that I find it exasperating that Jagex has crippled it with unnecessary trade barriers.

The tight trading ranges and slow price updates have nothing to do with running a market exchange. They simply represent another case of Jagex trying to control players and dictate their actions. The GE feature itself is sound, and there’s still plenty of time for it to be adjusted so that it lives up to its full potential, but right now it is headed down the wrong path.

It is true that as time goes on and prices do adjust, some of the current bottlenecks in buying and selling will clear up. The fundamental problems behind tight 5% trading ranges and daily price updates, however, will not. I don’t think Jagex will ever allow us to have a truly free market on the GE, which is part of why it will never replace other markets. I do hope, though, that at the very least the company will consider either widening the trading ranges to something more practical, and/or increasing the frequency of price updates so people don’t have to wait all day to sell items.