Undercutting: A Discussion

[Eburk]

Is undercutting something that should be frowned upon, accepted by two merchants as 'just business', or a cheap trick to try and remove business from other merchants?

For those who don't know what 'undercutting' is, let me give you an example:

Merchant 1 (M1) sells a stack of lumber for 30gp.
Merchant 2 (M2) sees that M1 is selling the stack of lumber for 30, and as such puts his up for 30 as well.
Hoping to get even more business than his competitor, M1 lowers the prices of his lumber to 27gp.
Not wanting to seem overpriced, M2 places his lumber for 25gp.

I think you get the point. I personally believe that this could be a good thing, providing positive competition between businessmen so that prices never become inflated. Though I must admit, inflation is probably inevitable.

So you might be thinking: how could this be bad? Well, let's look further down the road. Both merchants have been so busy undercutting themselves that they eventually are down to selling for about 10-15gp a piece. Some other crafter comes along, buys out both, and is able to sell for twice of what the original two were selling it for. Thus, two merchants end up poor, one ends up richer. This would go along with the simple method of the rich become richer and the poor become poorer. Greedy people are busy trying to undercut each other, but the smart merchant learns that he may utilize the greed of the two to buy it from them and make his own money.

Maybe I'm reading too far into this, and I doubt it'll be much of a problem, but is still something to look for and to be wary of. Lesson: don't become too engrossed with trying to undercut your competition unless you know you have good funds to begin with. Otherwise your prices may be lowered more than they should be.

-Eb

[Raya]

Another good topic for discussion. To be honest, I never thought of my practise as undercutting. I always thought that me and my partner strived to have the best prices available. We would look at the going prices for things in the bazaaar in EQ and then sell ours for the same or slightly less. We didn't keep on going down, unless there was a significant drop in all of them. We used others' prices to find out what the going rate for various items was. I really don't see anything wrong with that.

However, I can see, from your scenario, how it might be a bad thing. Problem is, I don't know how honest merchants can hit just the "right note." If you state your price as higher, people will be very reluctant to buy. If you put it the same as everyone else or slightly lower, then you are starting a price war or putting yourself in a position of not profiting. What is the solution?

[Eburk]

Frankly, Raya, I'm not sure there is a solution. I'm not sure if there needs to be one :)

Undercutting isn't necessarily a bad thing. I think I'm taking the scenario to an extreme in that case, but I guess eventually you would see rare items becoming less rare as more people looked for them, and as such the price would begin to lower. Now this could be good, but it's not exactly nice to see that Flaming Sword of Slaying you worked so hard for (which used to go for 100,000 gold) now down to 30,000 that you had in the bank the whole time.

I don't think this will be much of a problem, considering most merchants will probably draw a line as to how far they'll go. I just hope some people don't become too greedy or nothing :)

[DarQueNess]

The down side to uncercutting actually comes into play when the crafter does not reflect the advantages of buying from the people involved in a price war! My simple philosophy is: when asked what is the price for 2 stacks of lumber, my reply is pay me what you feel is fair! In doing that I tend to build a loyal group of buyers at keep a constant price for them no matter of what others are charging.

[hiddindragon08]

I remember the days in Ultima Online.. mmm.. sweet sweet memories..

We'd advertise that we're selling our ingots.. armor.. weps.. such..

Most people would ask what's the price? We'd reply -Make an offer.. That's the system 90% of people used just because it prevents undercutting to the point where you're selling things that you feel really should cost Amount A (A being a good amount of profit, you put some time in this.. but you're definitely not ripping them off) to selling it for Amount C (You're making a little profit.. but this is pissing you off because you took a good amount of time to make this.. and some jerk who got lucky in finding one, or is higher lvl than you and so he is walking all over your wares instead of selling something that people his lvl could use... -Granted that's part of the game, you're there to make some $$ and whatnot.. But undercutting forces the value of the item to decrease even though the cost of creating item doesn't increase.. As mudflation continues to rise, this offsets the game's economy. That's looking at some extreme undercutting that continues for a long long time.. but its what happened in UO on many servers.. And in WoW this happened on my server.. lot of crafters left their business because Blizzard decreased drop rates/spawn rates of materials/equipment mid range lvl, and the people were use to getting it for X amount. Thus.. As people couldn't get the materials easily, we increased the price.. and people wouldn't buy from us as much.. Eventually (and this was within the first 6months) I was smithing items and loosing money.. Kinda pissed me off that it took 8gold to make the weapon.. buying the materials for 8g was easier since finding the resources would take a good 10g in repairs and a hell of a long time.. and then i had to sell it for 5g. Pissed off.

Soo.. I can tell you.. "Selling Iron Platemail Chest.. Make an Offer!!" is the way i'll be advertising and suggest to my guild as well. =] If you're not satisfied, "Sorry man.. Costs that much to make, usually sells for Xamount but i've only got a couple.. Im sure i could get X++amount.. If you want.. I'll give it to for ya for X+amount.. That's Xamount less that I know i could get for it. Interested?." (And im being honest with my customers.. I want to make @ least X amount.. so if i can get 10g and it costs 7g to make.. I figure.. if i make 9g from this guy, help him get it @ lower than avg cost.. i made good profit, this guy will keep coming back.. and increase my traffic as he tells people of our great business.. And most importantly keeps me in good control of regulating the price without ripping off my customers or killing myself by selling it too low.

-Nu

[Ieranii]

Ideally shouldn't prices balance out as supply and demand increase and decrease?

[Dillgaar]

I think virtual economies are the best economical forecast models because in a virtual world the ups and downs happen much quicker than in real life.

M1 sells for 30g
M2 sells for 30g

M1 lowers prices to 27g
M2 lowers prices to 25g

M3 comes along and buys up both M1 and M2s stock and sells all for 30g for a profit.

If M3 can sell all of that stock for 30g then M1 and M2 have just been bitten by the greed bug. M3 was patient enough to wait and see what the best price they could get was and therefore profited from it.

time = money but it is not always a direct correlationion...

the longer you wait to sell a product the less time you are using to produce the product therefore if you wait too long you are hurting your profits because you aren't making more product, but then again if you create too much product the price will drop as supply will begin to meet/exceed demand.

if you sell cheap to sell quick you also run the risk of saturating the market and therefore permanently lowering prices for everyone. in the wonderful world of the financial domino effect, this could also have a serious effect on anything which needs this product to exist.

In terms of undercutting it is really only worth it if time is a major factor. Otherwise it is best to retain your original prices. If you find yourself constantly being undercut then it may be a sign that the value of your product is faltering and you may need to either look at selling your product cheaper, selling at a different time or switching to another product completely.

[panjandrum]

I would much prefer to see an auction system a la WoW, or both a broker and an auction house. Both are open to price fixing and various schemes for those willing to spend the time to do it.

Personally if I see something on the broker in EQII for a really low price I will snap it up and relist it at a realistic price. I don't feel I'm doing anything wrong by doing this, I'm sure I've mistakenly listed something below going rate as well.

[Jasarina]

I guess to me its just business. I played with the bazarr some in EQ1 and lately I have had some fair sucess in WoW with auctions. I like seeing a healthly competition between sellers. I also tend to buy out stuff that is at a low price and resell it at market value. The lower seller still gets his money and I can then resell the item to recop the cost.

Honestly I'd just assume give things away LOL but I need spells and my mount etc.. so I have to sell some stuff :)

Jasarina

[Skarlath]

Well undercutting IS a bit of a problem, because it can't operate the same way as real markets.

In the real world, people will undercut until they are only barely making a profit on the product. It will sell just above production cost, unless there is very little competition.

However MMORPGs allow people to get close to perfect competition. There are very few barriers to entry in the market (you might need to level your skills up a bit, or get some good tools, but generally anyone can get the same resources and make the same products). Products are identical (in games where crafting systems are poor) and so there is no room to charge more for your product on the basis of it being fairly different.

But the huge problem where things come crashing down is the investments required to gather resources or craft items from them. There barely is any. Costs to the harvester or crafter are a small amount of time, and perhaps some small costs for components or tools. Also people do all this whilst playing a game, and so they believe that they are having fun. So they don't feel its hard work at all to skip into the woods and collect lumber, or to turn that lumber into a ship. This means that the value of the item or resources to the player who collected or created them is fairly low. This of course then produces people who have no problem with selling things dirt cheap.

Then throw in that a higher level can collect low level resources, or craft low level items in HUGE quanities very fast, and you make it very easy to flood markets and devalue items.

Until investments by the harvesters and crafters become larger, MMORPG economies are going to have problems with undercutting.

[Khaalis]

A large part of the issue in the MMO economy is that there really is no "realism" involved in the economy. Its all virtual cash, virtual product, etc. There is no real risk assessment, profit to expense losses, etc.

Another problem is that many MMO's have massive rates of inflation due to influx of cash. I find that most sellers in these games sell by sheer greed rather than with any sense of business or economic understanding and it becomes the norm because the other players pay the price or are forced to do without.

By selling for greed, I mean people who want to instill the "normal" price for items at something like 1000% or more profit margins. These are the people who most often get upset at "undercutting". They want the general populace to think that Widget_01 is worth say 10g when in fact it only cost 1g to produce. In a real world economy a business would be doing incredibly well to gain even a 100% profit margin, yet in a virtual economy people expect 500% or more profit margin, and can often get it because of the level of cash in the game. So when Vendor B comes along and sells the same Widget_01 for 5gp, Vendor A yells "undercutting" when in fact it isnt, it is just that Vendor B has accepted a small profit margin as acceptable business. I also tend to see undercutters being far outnumbered by those who want to pricefix the server at much higher prices.

Also, when discussing undercutting... is it really undercutting? Or is it competition. In a real economic system it isnt "undercutting" unless the undercutter is taking a loss on sales just to damage the sales of a competitor. If the person selling at a lower point is still making a profit, they are simply competing with other sellers and hoping to base their business model on "high quantity at low profit" rather than "low quantity at high profit".

JMHO. YMMV.

[Avelia]

There is a point below which I won't sell something. Just because the forces of mudflation or competition seemingly demand that I lower my price to a few gold doesn't mean I have to do it. If I have an item I worked hard to get, I will vendor it to an NPC before I will sell it for next to nothing.

This goes double for crafted items. That guy selling for 27 when I am selling for 30? He may only have a little of that stuff when the market demands a lot. After he peddles his for 27 I will make my sale at 30. Heck I may even raise it to 35. ;) Or I will go to a different area to sell where I don't have to compete with him.

[Skarlath]

I find that most sellers in these games sell by sheer greed rather than with any sense of business or economic understanding and it becomes the norm because the other players pay the price or are forced to do without.


Perhaps I misunderstand you, but greed is the only incentive. Welldoing due to positive externalities occur by accident, or because a business is forced to by law. Ok, I'm being a bit cynical, but it is largely the truth. Entrepreneurs will not enter a market if they cannot make economic profit.

In a real world economy a business would be doing incredibly well to gain even a 100% profit margin, yet in a virtual economy people expect 500% or more profit margin, and can often get it because of the level of cash in the game. So when Vendor B comes along and sells the same Widget_01 for 5gp, Vendor A yells "undercutting" when in fact it isnt, it is just that Vendor B has accepted a small profit margin as acceptable business. I also tend to see undercutters being far outnumbered by those who want to pricefix the server at much higher prices.



This certainly is undercutting. When someone is making profit, others will enter the market if they can sell the same item for less. This might be because they are willing to accept less economic profit (which is a thoroughly natural tendancy, and how to real world market works) or because they can produce the item for less (therefore sell it for less).

A business is able to charge high prices for a good when they are the only supplier, i.e. a monopoly. If no one else produces a substitute for your product, and your product is something people do actually need, then people will have to bear your prices. Consumers will tend to opt for cheaper alternatives, except in the case of brand loyalty (through advertising) or in the case of ostentatious goods.

When a new entrepreneur enters the market and charges less, the monopoly is broken. The firms must engage in price competition (undercutting, perhaps until one cannot reduce their goods without falling below 'normal profit' (see below), or in non-price competition (such as the use of advertising).

Monopolies are characterised by large barriers to entry and imperfect information. However the problem with ingame monopolies is that, as I explained in my previous post, there are very few barriers to entry, and information is near perfect. So in MMORPG economies, Monopolies cannot properly form .. at least not in games so far...

Also, when discussing undercutting... is it really undercutting? Or is it competition. In a real economic system it isnt "undercutting" unless the undercutter is taking a loss on sales just to damage the sales of a competitor. If the person selling at a lower point is still making a profit, they are simply competing with other sellers and hoping to base their business model on "high quantity at low profit" rather than "low quantity at high profit".


As I explained above, undercutting is healthy market behaviour. Undercutting simply means a supplier supplys a good at a lower price than current suppliers - they do not need to be loss making.

However the undercutting this thread as a whole refers to is out-of-hand undercutting. Because goods mean so little to MMORPG ingame producers, they have extremely low 'normal profit' requirements (see below), and so undercutting can make prices fall extremely low. That, coupled with inflation (including MUDflation) can play some nasty tricks.

Also remember that it is a game, and games are often played by complete prats. In a real market, no one in their right mind would sell at a loss, but in an MMORPG economy some players dont have a problem with this. When you level, an item may become worthless to you, and so the minimum you will accept for it is trivial. However that item is still valuable to others and so by selling it at an incredibly trivial price, or giving it away for free, you are wrecking the market in which those items are sold from one newbie to another.


There is a point below which I won't sell something.


This is known as 'Normal Profit'. The minimum the entrepreneur is willing to accept. If the market price is sustained as lower than that (perhaps other people can produce the item cheaper than you can) then you simply will give up on that market. Any extra money made above this price is called Supernormal profit, or economic profit.


This goes double for crafted items. That guy selling for 27 when I am selling for 30? He may only have a little of that stuff when the market demands a lot. After he peddles his for 27 I will make my sale at 30. Heck I may even raise it to 35. ;) Or I will go to a different area to sell where I don't have to compete with him.

This is another wonky bit with MMORPG economies - supply is wierd because there aren't all that many suppliers compared to the real world. In real life there aren't just two suppliers except in an oligopoly. You don't hold an oligopoly in game because just because you two are the only ones selling now, doesn't mean you will the only ones selling tomorrow (back to lack of barriers to entry).

In real life you would go 'Damn, those cheap-labour countries produce far cheaper than I can! I guess I'll have to leave the industry.'

[Lochaber]

Undercutting has it's pros and cons.

On one hand it can make items sell for so low that it's not even worth the time to auction in. I never really had this particular problem in EQ1 since I usually sold high end tradeskill stuff. But in WoW it got to the point where I wouldn't even bother.

On the other hand, in EQ1, my time was important. I was a heavy raider and didn't want to get bogged down in the bazaar. So becuase of that I intentionly sold my items underpriced, sometimes by quite a bit. (Like if it sold for 150k pp, I'd sell for 120k or less). This way I usually had a buyer relatively fast who would then resell it (and spend quite a bit more time trying to do so). This way I could go back to earning AA or farming more Tradeskill mat's to make even more items.

[Skarlath]

On the other hand, in EQ1, my time was important. I was a heavy raider and didn't want to get bogged down in the bazaar. So becuase of that I intentionly sold my items underpriced, sometimes by quite a bit. (Like if it sold for 150k pp, I'd sell for 120k or less). This way I usually had a buyer relatively fast who would then resell it (and spend quite a bit more time trying to do so). This way I could go back to earning AA or farming more Tradeskill mat's to make even more items.

Ah, this main seem innocent and positive, but this is a cause, not an effect. Your undercutting undermines the stability of the economy. In theory it would be fine if everyone could do it, but eventually prices are driven so far down that the economy completely loses it's shape.

[Lochaber]

I agree with you there that it'd undermine the economy over time. On my server though, while I still played. Higher end items usually stayed pretty constant even with people like me just wanting to unload items quickly. Simply because the 24/7 hour bazaar farmers bought out the lower priced items and repriced it at the "standard" rate.

[nubbins]

undercutting is horrid tactic for the people trying to sell the lumber, but the people buying win

in the end ur better off not undercutting and starting a price war

but if you do make sure you can win :twisted:

[Skarlath]

A philosophical-economical question: Does anyone win?

Well fine, yes, and unfortunately in MMORPGS everyone who undercuts wins, simply because they put so little effort (or percieved effort) into the aquisition of the good that their minimum price is incredibly low. Sales need to be meaningful, and when this happens undercutting needs to be prevented.

[Ieranii]

My question is what is a fair mark-up? I crafted in EQ and in EQ2 and I generally sold for less than everyone else. I didn't do it for a speedy sale though. I did it because I felt their mark-ups were insanely high (on low end items especially). I could mark up my wares by 200% and still not even come close to the prices other people were asking.

In the end I stopped selling on the market and sold to people when they /tell me they needed something.

Bottom line for me though is that if someone out there has something they made for 1gp and are selling it for 10gp I'm going to charge less than them because I think their price is insane. Why am I obligated to match the high prices on the market?

[Skarlath]

Hehe, MMORPG economics is fun because they are so out of whack! You can have ridiculous undercutting, and crazy markups existing in the same economy.

Causes of mark-ups in MMORPG markets can be likened to cartels we see in real life - i.e. price fixing organisations like OPEC the oil cartel. With a cartel all suppliers of a good come together to decide on what price they will all sell at. There is no supply outside of the cartel (which in the real world is due to barriers to entry, i.e. you can't decide to set up an oil company unless you own land with oil under it). This means that if everyone in the cartel sticks to the agreement, then no undercutting occurs. People cannot buy the good anywhere else, yet they still need to buy it. They therefore must accept the high colluded price.

Price fixing is illegal for a reason. :)

Cartels require good communication, and for everyone to stick to the deal. Cartels tend to only have a small number of members, as the more members you have the more likely someone is going to break the deal, jump the competition and sell for less.

In MMORPGs, communication is near perfect. You can pop along the the local bazaar and see the majority of the market's supply of any one good. This means that if everyone plays cleanly, they can act as a cartel, often without even knowing it. People don't really know what an item is worth to themselves or other players all that much. This is because of the same thing that causing problems with undercutting - extremely low percieved effort in aquiring the item which leads to low percieved cost. Players aren't master merchants, and so they do the easy thing. They price along side everyone else.

Now of course not everyone plays cleanly! Ieranii and her conscience put the accidental cartel in danger! She feeds goods onto the market at lower prices! However this rarely has an effect. Once again, because there is so little percieved effort involved in getting most items, or crafting them, or harvesting for that matter, that there are lots and lots and lots of suppliers, supplying lots and lots and lots of the good. Ieranii's small, low priced supply is miniscule in comparison to the mainstream marked up cartel-supply. Undoubtedly hers is the first purchased, but it is quickly bought up and demand is still there. People still have to pay the ridiculous prices.

Through into the mix that players have no problems with having an item up for sale 24/7. In the real world you have to pay for storage space for your wares until they are sold. If they are perishable you have to keep them under certain conditions. If you don't sell them in time the good will be ruined. In MMORPGs this is not a problem. The player can leave their good marked up until it eventually sells. Which it will.


So this isn't a moral question. It's a design flaw in MMORPG economies. In my opinion it can be rectified with the following moves:


Make crafting, harvesting and general item aquisition harder. Make it take more time so that people's percieved effort and therefore value of the good is forced up.
Make some items perishable. I don't want swords eventually disappearing, but there are a lot of items, i.e. foods, lumber, that could change over time.
Make storage costs mean something. You should need a house to store things until they can be sold, and houses should need upkeep. Lots of upkeep.
If there are 'bazaar' type auction house markets, make it pricey to sell on them. Make it very pricey to keep something up for sale for a long time.
Again if there are bazaar type markets, break them up into small regions, so that information is broken up. This will disrupt the formation of accidental cartels - people won't know what something is selling for in Tursh. If they price too high then buyers will travel to Tursh to check whether they can get it cheaper.


Now I would also like to add that Sigil is fantastic. One of their key features in crafting will change Vanguard's economy dramatically.

Work orders!

For those that don't know, these are kind of like crafting quests. An NPC will provide you with a recipe and with materials, and you just have to make the item for them. I'm sure that Sigil has plenty of fancy ideas for cool work order variations, but there is one main thing that work orders will do. They will reduce supply of items to the market. With work orders your finished products, which are just skill ups for you, will be sold to NPCs, rather than being placed into player markets.

The effect this will have on marking up is that Ieranii's supply will no longer be miniscule in proportion. Items that people sell to each other will be custom orders, or items which they have specifically made to be fantastically desirable. Ieranii now holds a lot of sway in the market! If she wants to undercut those pricing extremely high then she can. People will buy her products first. Those high priced goods will have to fall in price before people turn to them.

So don't worry Ieranii! You are not obligated to rip people off, and with Vanguard just around the corner, things are going to change!

:D

[Loampounder]

People generally undercut because they do not care about profits, only liquidating. In that case, it's not a loss situation for that merchant. If he gets his money, he does not care the volume, nor does he care of someone else is playing merchantman to resell it. The situation in the OP seems more like a tangent possibility used to argue one side.

In EQ2, I remember many people undercutting resources or food. But that was because it had such little value. Who cares if you sold 20 ruined deer pelts for 1 cp each - it was trash anyway for those who collected it. Food was not as cheap, but it was generally overpriced for such an easy commodity (people really only made it in grinding, anyway).

For the real stuff, there was not much undercutting. Generally, the exact opposite happened - many many backpacks of the same type at the same price, pages of them. They did not spoil so people just kept them in their merchant account. Some prices of items did fall, but only for a while from people (like me) who only wanted their money. If people were willing to hold on to it until a dry season made a larger profit, but it was the cost of time rather than pure profit.

I did not see people cornering the market on a item. I think it's an urban myth because a) the market was usually too big to corner, with new loot coming in all the time, b) it's too risky, assuming that you can sell ALL of that material while you still have the market cornered and C) players have choices and usually just don't pay prices that are inflated. Sounds like a nice scheme, but who is laughing when that merchant has 1355 beaver pelts in his bank account that won't move?

[shiver]

Something to keep in mind is that a person who crafts 14 plus hours a day might not really be trying to undercut the other players. If you have a huge stock of items that you need to unload sometimes getting rid of it fast can be mistaken for undercutting.

I have seen deliberate undercutting when a group of people were trying to control the market. Generally, that pissed off enough people that price wars really got going for a bit. I don't think those short wars hurt the community since at the same time prices of other items got jacked up.

I suppose I tend to be one of the bad guys in the whole undercutting market. Hopefully, the work orders will give me an easier way to keep my stock of items down and my purse fat. I admit this thread is making me think some. I will put more effort into to the balance selling for what I think is fair and not hurting the more casual crafters.

[Skarlath]

Something to keep in mind is that a person who crafts 14 plus hours a day might not really be trying to undercut the other players. If you have a huge stock of items that you need to unload sometimes getting rid of it fast can be mistaken for undercutting.

I have seen deliberate undercutting when a group of people were trying to control the market. Generally, that pissed off enough people that price wars really got going for a bit. I don't think those short wars hurt the community since at the same time prices of other items got jacked up.

I suppose I tend to be one of the bad guys in the whole undercutting market. Hopefully, the work orders will give me an easier way to keep my stock of items down and my purse fat. I admit this thread is making me think some. I will put more effort into to the balance selling for what I think is fair and not hurting the more casual crafters.

Yes, and that is why it is so fantastic that Sigil is using a 'workloads' system. The market will no longer be spammed with skillups.

People get angry because they feel they have a right to content and that ol' chestnut. They feel they have the RIGHT to earn extortionate amounts off the backs of other players. The game should simply make sure undercutting cannot get out of hand (see my previous posts on how) and then players will be quite at liberty to act like a real market.

There are no bad guys. You bend the market along the rules the game imposes. The game just needs to have better rules so you will be acting more like the agents we see in rea life markets. :)