King Aurther and Opportunity Cost

Post by Kammler from Kammler's Korner
One of my favorite movies is the 2004  King Arthur (Clive Owen, Keira Knightley) Not only is it told with an interesting twist on the Arthurian legend but it also contains one of my favorite movie scenes of all time.

Arther and his knights are escorting a Roman noble and his family to safety ahead of the invading Saxons. They must complete this task to earn freedom from their servitude to Rome. In his benevolence, Arthur chooses to escort the noble's vassals in the evacuation. This act of kindness slows their escape dramatically--what with oxen pulling carts, elderly and nearly crippled peasants and the only horses belonging to Arthur and his knights.

Unencumbered and hungry for a fight the Saxons march all night and at a much more war-like pace. Finally, the Saxons are nearly upon Arthur and the procession as the escape route runs smack into a frozen lake in the mountain pass. With no way around, they must cross it--slowly, because the combined weight of too many knights in one spot may crack the ice and plunge them to their deaths.

Arthur sends the noble and the remaining procession forward to Hadrian's wall whilst he and his knights stand to battle the Saxons upon the frozen lake. Outnumbered 25-1, the knights prevail with only one casualty.

But what does this have to do with opportunity cost?

In its purest form, an opportunity cost is the loss of an alternative course of action that occurs when a different course of action is chosen. Most often we think of opportunity cost in terms of financial choices--investment, jobs, or even earning gold in WoW. But it also applies to Arthur in this movie scene.

His choice is to stand and fight despite being horribly outnumbered. His opportunity cost is that of moving closer to reaching safety at Hadrian's wall. Other choices were also eschewed--setting traps for the Saxons, waging guerrilla warfare against them as they marched, slowing the invaders so that the caravan could make it to safety, etc.

The Challenge
Similarly, our choices of how to earn gold in WoW are zero sum choices--the are mutually exclusive due to time. One cannot both gather herbs AND craft glyphs at the same time. The choice to do one or the other makes the one not chosen the opportunity cost of the other selection.

Because in WoW we can gather herbs and THEN go mill them, make ink, buy the parchment, craft the glyphs and list them in the AH many players get confused by thinking the materials did not cost them anything. No gold was actually expended, right? These players believe that since they gathered the materials themselves they "saved" the cost of purchasing them on the AH. And this line of thinking can also further degrade the AH economy by leading players to dramatically undercut auctions, which can hurt everyone.

Here's a simple example using one stack of Elementium ore. Two players are involved, both starting at the SW auction house. Who earns more?

Two Paths Diverged in a Lonely Wood....
If Player A travels to Twilight Highlands and farms the Elementium himself he may spend a couple minutes flying in Stormwind to the portal, then port into the zone and fly around competing with bots or other farmers. Gathering this one stack of ore takes Player A 11 minutes overall. No actual gold left his coffers--he is instead out 11 minutes time.

Player B walks into the AH and buys a stack of Elementium ore for 80g, goes to the mailbox and collects it. 80g has left his purse and he also spent about 30 seconds buying and collecting this ore--we will say 1 minute.

From this point forward there is no difference in their experiences--both will prospect the ore, buy Jeweler's Settings, go to the forge in the Dwarven District, make their Carnelian Spikes, DE them, and list the products on the AH. Further, we will say the ore prospects into 9 Carnelian gems. Granted, in actual game experience any one of six basic gems will proc. Getting 9 gems from one stack of ore isn't unlikely--for the example we are saying we get all the same kind, and moreover, valuable Carnelians.

Each player spends 10g 80s on the Jeweler's Settings. Each player receives the same 9 Greater Celestial Essence upon DE'ing the Carnelian Spikes. The AH lists 54 auctions of Greater Celestial Essences ranging from 49g to 59g. Each player decides to list his Greater Celestial Essences at a price that should sell quickly. Each settles on 46g, below the lowest price in the AH, making the total listing worth 414g. These sell for each player in an hour or so. They each go to the mailbox and collect 393.2g (after the AH fees).

Player A will say he made 383g after expenses (the Jeweler's Settings). Player B will say he made 303g after expenses (the initial cost of ore plus the Jeweler's Settings). Who actually did better? Let's compare.

And The Winner Is....
The opportunity cost for Player A is 80g that he chose not to spend; the opportunity cost for Player B is the 10 minutes he didn't spend on farming. What did Player A do with the 80g he saved by farming? What did Player B do with the 10 minutes he saved by buying retail? That comparison holds the key.

If Player A used that 80g to buy something to flip for 100g, then his incremental revenue is another 20g. If he used that 80g to buy a new weapon, then the weapon becomes incremental value. Or if he just held the 80g in his bank he earned no incremental value. He netted 383g and no more.

If Player B used the 10 minutes he saved to quest, then he gained experience and reputation as his incremental value. Or if he chose to run one of the dailies in SW his incremental value earned was the cooking token, or jewelers' token or whatever.

But let's assume Player B is a goblin. He instead uses his 10 minutes saved time to replicate his original investment. In 10 minutes he saved farming he is able to purchase, prospect, craft, disenchant and sell mats from 3 additional stacks of ore. In our original example, the stack of ore prospected into Carnelian gems. Let's say the 3 additional stacks prospect into other gems so the actual net from each stack is less--say 150g/stack. Player B then used his 10 minutes to generate an additional 450g in profit.

So who did better? Player A kept 80g in pocket but Player B earned 450g additional profit, or 370g net net over Player A.

Is Farming Ever Viable?
Don't get me wrong--there are times when farming is a great strategy. If you are questing in a zone and mine every node you find as you travel then you are only out the few seconds it takes to detour and collect the node. Farming is made even more attractive if you are leveling since you will earn experience for the nodes you mine.

Or if you are farming in a deserted zone or at some off-hours time when no one is around you may not have competition for nodes. This makes your yield higher than normal. Or you may not have liquid capital in sufficient quantity to purchase from the AH, or the prices of what you need are so high that you can't make a profit unless you farm it yourself.

Or maybe you just like farming.

If any of those reasons are why you farm then good for you! Enjoy your play experience. Farm your pixilated ass off.

But realize that in so doing you aren't collecting materials for free--there is a cost associated with the time it takes you farm. And you have to calculate that cost, that missed opportunity, in your pricing and sales decisions.

Deep Undercutting: The Logical Fallacy
Further damage occurs when the "I farmed it so it is free" fallacy is then misapplied by the deep undercutter. This player decides that the Hurricane scroll he can enchant with the Greater Celestials that he generated in the above example were "free" so he undercuts the seller in the AH by around the value of the Essences. In other words, the two Hurricane scrolls listed are at 950g each, but the deep undercutter says "hmm, I saved 380g by farming and DE my own mats--I'll list my scroll for 575g".

By failing to calculate the opportunity cost involved this player actually loses money. He spent 10 minutes farming (thus missing out on 450g incremental profit in our example above). He also misses out on the 383 net profit he would have made for listing the Essences instead of crafting. Opportunity cost burns him twice--farming  time and using the Essences to sell as materials. His actual break even for this scroll is 383g plus 450g, or 833g. Break even. 950g would give him roughly 120g in profit. But he sells at 575g which is a net loss of (833-575) 258g.

Let me say that again: he suffers a net loss of 258g. And that assumes he already had the Heavenly Shards needed to craft the scroll.

But not only does he suffer a loss, he is deluded into thinking he has earned a profit--after all, he didn't spend any gold directly for the Essences so he feels this cost can be subtracted from his profit calculation.

But What Do We Learn? Hopefully Something.....
If the AH worked like a real market we would just say "let him operate at a loss and he will suffer the consequences". But it doesn't and he won't. Players have a single choice for purchases--the AH. And when a third player wants to sell his Hurricane scroll and sees listings of 950g, 950g and 575g, he naturally will list at 575g or less. Now the 950g auctions expire. Their sellers re-list at 560g. And so on. Profits eroded for all based on a stubborn player who doesn't understand opportunity cost.

I've rambled on long enough. I'm not opposed to farming, and I do believe deep undercutting can be viable in some situations. I really hope that more players will begin to understand opportunity cost and how it should affect their pricing decisions. The challenge is explaining to "Hurricane Posting Guy" above that when his bank account increases 575g he is actually losing gold.

Arthur and his knights were willing to suffer the opportunity cost associated with making a potential last stand on that frozen lake. After all, they were fighting the valiant fight, for justice and for the less fortunate. Had they died (spoiler: one does) they would have done so willingly--theirs was the greater good.

There is no similar "greater good" in the AH. We all want to make gold, to generate income for its own sake or to fund our other needs in game. Let's just try to be mindful that every choice we make has a cost associated with it. Let's hope we calculate these costs appropriately so that our market becomes more stable.

At best, it will take a long time. At worst, things will stay the same.

26 comments: on "King Aurther and Opportunity Cost"

  1. The problem is when you add auction house botters to the equation. The ones that camp the auction 24/7 forever. They don't care about making gold on every sale. To them it's more important to dominate ALL the sales even if it's at a loss until nobody else bothers posting anymore. Then they put the price sky high and make a killing.

    Posting this anonymous because evertime someone tries to bring this subject up the botters jump all over with the "UR BAD" comments.

  2. I don't think they are technically AH "botters". I think they are players who are legitimately playing the AH and using crafters and other legitimate ways to make gold. But at the end of the week they sell all their gold to outfits like IGE and walk away with real money.

    After months of seeing one of these guys operate on my server (level 1 account deleted and new one created once a week, all items supplied by a separate high level account) and opening dozens of tickets, I finally faxed Blizzard and got him banned. It seems like they take faxed more seriously than tickets. It's worth a shot anyway, if you are certain that you are competing against a gold seller and not just a very enthusiastic unemployed goblin.

    Regarding the King Arthur story, it's a nice touch to the post, but you might want to fix the spelling on "Aurther". I'm not a spelling nazi but I found it distracting. (feel free to delete this portion of the comment, I just wanted to let the author know about the typo)

  3. "And when a third player wants to sell his Hurricane scroll and sees listings of 950g, 950g and 575g, he naturally will list at 575g or less."

    There is another option and that is to buy the 575g scrolls and flip them to maintain the value of the others. Excellent article and for the first time someone has explained to me how farming is a loss.

  4. @ Anon (#1): gold sellers should be reported. People who play the AH as a legit part of the game are not doing anything wrong. My opinion isn't that you are bad at all, but I do think there is a distinction between these two types of players.

    @ Anon (#2): I fixed the spelling on my blog site. I thought I got all the errors but missed a couple. Doesn't matter why, it was sloppy. Thanks.

  5. I know how this post feels most everyday..What do I do first? What do I focus on? The more time I spend on the ah the worse my gear is because I am not running random dungeons. the more time I spend in a battleground because its fun, the worse my pve gear is because my guildies are constantly running dungeons. to me honestly please don't tell this secret...I don't like random Dungeons...I find tank and spank boring...then even if the boss has some special move or add..eventually that is boring too..
    I like running my two jc's dailies and a alchemy xmute. But after that its a toss up. I know what it means ..if do A and B..C and D will suffer..the more cross faction trading I do which is really profitable..the less I am leveling up a death knight...the more I try to tank with my pally the less I can learn healing with my priest...Economic Profit was not clear to me in 1987 in Econ 101..but in 2011..with 5 characters over 80...I truly understand what Dr.Zygorsky was finally saying about the difference between accounting profit and economic profit..they are not the same.

  6. As already pointed out, if the price is too low you are welcome to relist the item for a higher price, shifting the risk not to sell it above price to you.

    If there are enough people to buy it, the risk is low.

    The opportunity cost, that you are stating here to be a value by your definition is a value by the sellers definition. How much does he value his own work? If he values it lower then you do, heis essential underbidding you with cheaper labor.

    Now where have i heard that before ...

  7. This is a good post for dummies who do not understand opportunity cost, and spend all their time farming saying- I basically got these mats for free, so I don't care what I sell it for-- Can't tell you how many times I've heard that

  8. This needs to be cross-posted to Moronic Champion.

  9. 1st off. This is a game. "an amusement or pastime".
    The opportunity cost being tied to making more gold is a fallacy in it's own right - purely, utterly and only because of the unavoidable fact, this is a game.
    The only opportunity cost is that I might have had greater amusement elsewhere.

    There are plenty of people (in my guild for one, and including myself) who get supremely bored making gold. It's so easy. There's no challenge. It's not fun. It's not an "amusement".

    The delicious irony in this article is the failure to recognise someone else has a very different opportunity cost.
    "Profits eroded for all based on a stubborn player who doesn't understand opportunity cost."
    Bzzt. Wrong. They understand their opportunity cost perfectly. You're failing to understand *theirs*.
    eg. Their opportunity cost may be that they can only sell in a very small time window - and want it sold. Fetching the mats was fun, selling the result is not.
    Again, the opportunity cost is retaining the *fun*.

    Articles that try and berate others for doing it wrong completely miss the point. Rather, *understand* why people do things this way is key.
    Anything else is preaching to the converted.
    Accept that people will sell stuff for "silly" prices. Their interest is not in your profit. Or even maximising theirs.

    So are you willing and capable to accept *that* challenge? Or continue to try and fail to convert the Pagans? :-)

  10. Excellent post....

    Amazing how games relate to reallife. In the 19th century, the british empire decided to colonize the world so that it can exploit "farmers" to get mats (cotton, jute, ore, leather) and provide value to the mats (finished goods, textile, machinary etc) and sell it back to its colonies. Quick path to wealth huh?

    After story: Soon enough China emerged and started selling finished goods back to its western counterparts...:-) Now the western dont produce mats or finished goods..
    Borrow money and consume goods.

    Wow Banks dont fail.. they dont lend money!

    Wish Politics was a part of wow or even better, may be the stock market where you can buy stocks in guilds!

  11. Excellent post. I love seeing economics in action like this. You did a great job of explaining some complex principles very simply.

    As for others having a different set of oppurtunity costs: sure. But the fact is, profits - as in the economical definition of profits - are eroded for all because of a few ignorant AHers. I don't mean that in a demeaning way - I mean it as a fact. Whether or not it was their goal or objective to make money, they have eroded profits. However, I like that Iometa pointed out you can buy that low priced item and flip it. These principles and modes of thinking are exactly why I read these blogs. Making gold is a mindset - a way of looking at the world. It's like I've been looking at gold upside down and am now finally on my feet seeing things as they are. Keep it up.

  12. Missing: today`s nugget of wisdom from Mageshadow or Markco. Today was the first day that I honestly feel I didn`t get more than my money`s worth. I thought we had a good arrangement going here. You`d post useful information for me to read over my coffee and I`d click a few of your ads to generate you some income. Your`s is the THIRD blog to run this exact post. Originally run by Kammler, then rerun by Cold (or possibly Wes at CbC) and now re-rerun by Mageshadow. I know your busy because I`m busy but I`d rather look at a short note along the lines of `Sorry I got nothin` or `apologizes, real life got in the way, no post today` I`d have more respect for you and your efforts than I do currently. You copped out on your job and you crapped out by not following the other blogs. At least Caffiene Smokes and AH fees tells us when there`s nothing. Hell MissMediocre has bigger stones than you, Mageshadow. She at least has the balls to apologize for not posting because RL got in the way. The jist of my rant is that I got screwed by you with no new post so I`m not clicking any of your ads for a bit.

    Cheers, Geargrinder

  13. Youch Geargrinder. It's not that fact that I didn't have time to put up a post, In fact I have multiple posts up in queue at any given time, so it's not like real life got in the way, I just decided to post this instead. What can I say, great content gets around, I knew cold ran this post before, but it's such a good post I decided to run it once again

    Also, I did post the JMTC Meeting recording today, of which has multiple great ideas (:

    But thank you for your feedback, even if negative, It is greatly appreciated

  14. Someone can post something on the AH for a gold loss, but still make a net profit, because they had fun during those 10 min they spent farming, and they value fun greater than gold.

  15. Very nice post. I particularly like how you show that the impulse to sell the scroll below market (since mats were ‘free’) is actually a money-losing proposition.

    Three additional thoughts, in decreasing order of importance...

    1. I don't see underpriced items as a huge problem, because the market is self correcting. At some point, the whole thing becomes silly and you can just buy up all the stuff being sold at stupidly low prices. For example, over the weekend, the Glyph of Cleaving, which is usually dirt cheap on our server (3g-10g), reached silly lows, down into the silver range (<1g). I bought them all up, around a stack of glyphs, for perhaps 25g. I promptly put up two at 198g and sold one.

    Sure, the market is back down to under 10g now, but I made 175g profit on my investment and still have a stack of them now.

    The caveat I’d concede is that to buy up a load of items you have to have the capital to do it, as there is risk with building inventory of anything. But if you’re well capitalized and diversified, these are not situations to be annoyed at but rather opportunities to seize...diversification *ensures* the elimination of risk.

    Speaking of diversification, the simpler option (as Markco would often point out) is that when prices are below a reasonable profit, you can simply switch to something else to make money for a while. The markets will self-correct eventually, and you can come back.

    2. I don't get the Arthur analogy at all. No idea how it relates to opportunity cost. I can vaguely remember the scene, but I just don't get how their choice illustrates anything other than ...the fact that they made a choice. To show that, though, you could pick just about any scene from any movie. I’m probably just missing the obvious, though.

    3. Never mind. I could have sworn when I first drafted this comment, that the example given in the post involved farming Obsidium in Twilight Highlands.

  16. First of all, don't disencourage people to farm, after all, someone has to do that as well.

    Even having 100K+ I find myself farming around on my dps-es waiting for the dungeon queue, or whilst leveling my hunter pets, but after 5-8 minutes it gets boring.

    Sometimes the mats are simply not available on the AH, or just very overpriced (like HeathBlossom).

    The bottom line is that even being an AH hobbiest, I enjoy to play as well, no kills = booooring. Just crafting, disenchanting, prospecting all the time isn't that much fun either. And after all, at some stage you have so much gold, you don't really know what to buy next.

  17. After reading all the comments, I feel that I need to add my two cents. I am a daily blog reader (and writer as well), and somehow if this was posted at other blogs, I missed it. If you were saying that the same "topic" has been written before, what hasn't?

    Look at is as watching the news. There's ABC, Fox, NBC, CNN, etc. They all cover the same things (overall), but they also have a different "personality". I guess for me it boils down to which style I like to read....

    For those that are hating, you must not realize what it takes to write something like this. [Most] of us can't just sit down and have an article wrote in 20 minutes. There will be errors, there will be misdirects (and god knows people point them out), but I think that Kammlers main idea is the same as mine, to get our readers thinking. And from looking at the comments, it worked...

    I did enjoy reading everyones comments, no matter whether you are a hater or lover, you have a chance to write your ups or downs. Everyone has an opinion. We are entitled to. And my opinion is it was a great article. Great job on the Guest Post, and thanks Mage for posting it.

    Someone else mentioned this, but I agree that on guest posts (for JMTC), it would be nice to see a few comments from "King" Marco, as that is why we started reading this blog in the first place....amirite?

  18. @ Alto: Thanks. Appreciate the props.

    In general, I'm happy that this topic is receiving some discussion. It just means people are thinking about it more, which needs to happen anyway.

    Sure, the King Arthur analogy is just literary convention--an opening and closing to bring some color to the concept. If I'd have been watching "Up In Smoke" or "Apocalypse Now" the tone might have been very different, lol.

    I don't discourage farming. To the contrary, as an avid non-farmer I rely on farmers to supply the mats I need to purchase. My only message to farmers is that if you farm it, there is still a cost attributed to the materials.

    Similarly, I don't disparage undercutters or think they are wrong. Some know exactly what they are doing. Others don't understand the economics. Hell, I undercut in AH PvP, when needed, to reset a market or drive out a new competitor.

    As far as the example of the 575g undercut of the 950g sale, yes, I could buy it and flip it. But could I instead use that 575g to do something more profitable? If I could buy 575g of ore, run the shuffle and make 1,200g then I would do that instead--625g profit vs 325g on the flip. That is the point of the article.

    I find it ironic that the poster who says of earning gold "It's so easy. There's no challenge. It's not fun. It's not an 'amusement'", actually makes that comment on a blog devoted to helping people earn gold. And then accuses me of missing the "delicious irony" of ignoring something I discussed in detail. Weird.

    More to your point Alto, anyone who has an idea can /tell others. It is something else to put it out there in a public forum for general discussion.

    I invite anyone to write a post and tell us all how you find some strategy working. Undercutting makes sense? Tell us all how. Educate us.

    I'll put it on my blog and we can all discuss its merits in greater detail.

    And many thanks to JMTC for the space. /tips hat

  19. It occured to me that your example is flawed - because you didnt use realistic results for the prospecting, your end result of how the profit was distributed between the person who spent 1 min via AH and the person who spent 10 min farming first, resulted in the wrong ratio between the two activities.
    While I think you probably would still come to the same conclusion, with correct results, farming might be a lot better than your example sugests, when compared to the other activities.

  20. @ Simbaria: The result of 9 gems does not occur often when prospecting Elementium--let alone 9 Carnelians. However, the example works since the equation is balanced on both sides--whatever is prospected by one is purchased by the other.

    The original version of the post had a more realistic number of gems. But the extra words it took to explain which gems, how they were cut, what the values were, what was DE, etc., I decided to edit it down to the 9 Carnelians since that is pretty well understood to be DE fodder--made it shorter and the math easier.

    The point remains the same, it was done for an example.

  21. One thing I think people assume with Opportunity cost discussion, is the implied value of that "saved" time.

    In your example, if Player B ( the one that bought the ore) sat AFK for the next 10 minutes ( waiting for DF, chatting with guildies, etc). Then Player A actually comes out ahead.

    I agree with everything in the post, my only caveat is that you can't assume that the time saved is utilized at 100% efficiency.

  22. I will have a response up friday in the form of a post. Great discussion so far everyone.

  23. Nice post Kammler.

    1) I Never hosted this post or any other post similar to it. Someone is just exajerating to beef up his own arguement.

    2) Farming is good for us goblins though. Someone needs to supply us with raw materials. It's when those farmers wise up and realise they could be utilizing there materials for more profits that we start to miss them.

    3) Farming is a great way for non-goblins to start to get an understanding of how to make gold. When they learn, they leave the farming trade and join the auction house battle.

  24. Keep in mind this is a game, meaning most people play just for the enjoyment of playing and to waste time. Meaning the only 'real' opportunity cost decision is a)play some WoW or b)watch some t.v.

    Time has no value when you're just wasting it out of boredom or playing a video game for fun.

    Having said that I dont farm out in the world and tbh I'm completely sick of making gold in general but cant help myself to be 'player b' while waiting in que, farming the ah and crafting and end up making 20k a day.

  25. Some of these comments are just absurd. The fact that "it's a game" doesn't change the definition of opportunity cost or how to calculate it. What a useless comment.

    If you hate farming but love gold, then farming for the sake of making gold might not be the best use of your time. Farming doesn't provide "free" materials. That's all this post is really pointing out.

    Multiply Mageshadow's example by 6 and all of a sudden the guy is spending an hour farming. That's a lot of time - it adds up quickly.

    And time is REAL LIFE money in this game, since we pay by the month - perhaps another thing to consider.

  26. @ Kammler I don't buy it. I don't agree whole-heartedly with Simbaria.

    He even explicitly said that he feels the same result would be reached with a realistic model, but not as skewed.

    Just because the 'equation is balanced on both sides' does not mean, Kammler, that it is equal. Let me explain:

    Let's assume, instead of 9 Carnelians, we got 6 Jaspers. Let's say for the sake of this analogy that the Jaspers sold in some way that meant they each got roughly 60g worth of items (Ie, the jaspers translated to 10g/ea).

    Now, in this example, Person A (AH-guy) spent 80g + 1 min in AH to lose 20g + another min in AH (posting/collecting mail), whereas Person B spent 11 min + the same 2 min in AH to get 20g.

    Now let's say that person A repeated this cycle 5 more times (To balance out with person B's time spent) - then they both spent the same amount of time, person B got 60g for their 12 minutes while person A lost 120g for his.

    In my example, Person A is losing money with time and Person B is gaining money with time. In your example, it's the exact opposite. How to explain this contradiction?

    Neither model is realistic.

    It's so easy to say "Well what if I milled these herbs and then made ALL UNIQUE WAVES CARDS" but at the end of the day the Earthquake cards will wrench your model if you don't consider them appropriately.

    With a more realistic model, I also think that buying and flipping items (As long as you don't become one who parks in the AH all day) is the faster/more efficient method of making gold, but you are, quite frankly, skewing it to this side far too much and corrupting people's ideas.

    In short, use a more realistic example next time and I will stand and give you applause rather than disappointment.

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