I am re-posting this from my original thread on the WoW General Forums.
Please note that this has nothing to do with the Annual Pass and is simply about the economics, and more specifically the lack of contracts, in World of Warcraft
For some time now I have been learning economics and finance in school.
One of the key points that is focused on is the idea of a Financial Contract.
The Financial Stuff (Scroll down for the WoW Stuff)
For those who are not aware of what a contract is, I have a definition courtesy of Merriam-Webster:
a : a binding agreement between two or more persons or parties; especially : one legally enforceable
b : a business arrangement for the supply of goods or services at a fixed price <make parts on contract>
Now, why are contracts important? Aren't they just for big banks? Aren't they complex and difficult to understand?
Contracts are what allow people to conduct business. A common example is buying a car:
When you buy a car, you make a contract with the car dealership to make payments at certain predetermined times in the future. This benefits both sides. The car dealership gets all of their money plus interest for the time it takes you to pay it and you do not need to spend a huge sum of money upfront to buy the car. Both sides benefit.
In this example, I only mention one contract. The truth however is that the salesman (and every other employee that works there) has a contract with the dealership, the dealership has a contract with each of the suppliers, and both the dealership and the suppliers have contracts with banks to provide them with the money they need to function.
At every step along the way a contract is being used to allow this business to provide a service that can be counted upon. If at any point a party in any of the contracts does not fulfill his end, the government can enforce it.
Here is another key word: Enforce
A contract that is enforceable means that it can be counted upon, so that both people who go into the contract know that it will be upheld. If either party does not uphold their side of the contract, they can appeal for the help of the government who will make sure that the contract is applied properly.
From the point of view of a business, the ability to enforce contracts is one of the main reasons for the existence of a government. By enforcing contracts, a government allows business to proceed smoothly. It allows people the safety of knowing that their investment is safe and their money will be repaid.
The WoW Stuff (Scroll down a little further for The Problem)
World of Warcraft(WoW) has a supply and demand economy like many economies do, but it lacks in one key aspect: the enforceability of its financial contracts.
Most trading in WoW is done through the auction house(AH). The auction house allows us the peace of mind, knowing that our transactions will be conducted safely and efficiently. It allows everyone to appreciate the benefits of a supply and demand economy. This allows the most basic of financial contracts to be carried out, a transaction in which the total agreed upon value of the product is exchanged for the physical product at the time of the purchase.
This contract is one of the most important, but it is also very limiting in its scope. It allows a person to buy an item if and only if they have the total sum asked for all at the time of the exchange. For very expensive items, this transaction scheme becomes unmanageable.
Here is an example of an item Chelley's Sterilized Scalpel that I'll say is going for 5000 gold.
Here are two ways that this exchange could be conducted:
1)
Person A: Selling Chelley's Sterilized Scalpel 5000 gold!
Person B: Buying Chelley's Sterilized Scalpel 5000 gold!
Person A sells to Person B through the trade window.
In the first case Person A receives the amount they wanted without having to go through any hoops. Both Person A and Person B are happy.
2)
Person A: Selling Chelley's Sterilized Scalpel 5000 gold!
Person B: Sorry, but I do not have 5000 gold at the moment, would you be willing to accept 5500 gold paid in equal payments every two days over the course of the next twenty days?
Person A: Sure
Person A gives Chelley's Sterilized Scalpel to Person B and receives 550 gold every two days, for twenty days in total.
In this case, Person B could not afford the 5000 gold all at once, but could afford to raise 550 gold every two days. In this agreement, Person A got 500 more gold than they were expecting and Person B got an item that he really wanted, but could not afford all at once.
The Problem
Blizzard does not openly enforce player contracts.
This line is devastating to people like Person B. People who want an item and are willing to pay for it, but cannot afford to pay upfront. It is also annoying for people like person A, who could get an extra 500 gold for their item, but are unable to.
In the terms of economics, the unhappiness experiences by both sides is called Deadweight Loss, a trade that could have happened, but is unable to due to market conditions. These trades not being able to proceed causes a negative impact on the economy.
While I gave an example of a single trade, there are many trades that go on every day in which a person is forced to sell an epic item for much less than it is worth. This causes a great deal of trouble to the person trying to sell the item as they don't want to spend a huge amount of time selling the item and yet want a large amount of gold for it.
In every trade where a person is forced to offer a significantly below market price for an item that someone would have paid market price for, a small amount of deadweight loss is created. This deadweight loss is experienced by the player-base in the form of being unable to sell items or being unable to buy items that they want.
We have all experienced this issue at some point or another in our WoW experience and it is a prohibitive factor affecting the economy we have all become comfortable using.
Possible Solutions
Now, I do not claim to have any remarkably profound solutions to this issue, I have a few possibilities which, while theoretically possible, would be difficult to implement.
The first possibility is already in the game: Blizzard upholds agreed upon loot rules in groups.
This is a relatively profound statement. Blizzard is saying that if players agree to distribute loot in a specific manner, Blizzard will honor their agreement.
Here is an example of how this can be used:
Say a group of people enter The Dragon Soul raid in 25-Player Heroic mode. After they conquer the earlier bosses, they finally reach the Madness of Deathwing. Unfortunately they have an issue. The guild members do not know how to distribute the mount that drops from the boss (Life-Binder's Handmaiden). This is a serious problem until one person steps up and says "I would be willing to pay 5000 gold to the guild every week for the next 10 months which will be given to the guild vault to provide enchants and flasks for raiders". The fellow raiders agree to this and will all benefit from it.
Blizzard now comes into the picture. If for whatever reason the looting agreement is not held, the item could be taken and redistributed to the group. Blizzard has been shown to enforce looting agreements in the past and this is no different. If the agreement is not held, the item will be taken.
Going through the looting system might be one way to get a form of a looting contract.
The second possibility is to provide people with an in game system to loan money.
This concept could be applied similarly to the Federal Reserve, which can sell government bonds or loan money to people depending on whether money needs to be taken out of or placed into the economy.
The in game equivalent of this system would be to place an NPC (almost certainly a goblin or a wind-trader) who would be able to lend money at an interest rate and would receive money from players that could be invested at an interest rate.
While not an optimal solution from the point of view of enforceable contracts, this would allow money to flow more freely through the economy and reduce the deadweight loss created by the lack of contracts.
The third (and final) possibility is an NPC who could allow two players to agree upon a predetermined payment schedule to pay for an item (or gold)
The NPC could allow the two players to list the days that money will be exchanged and the amount that will be paid on that day.
This would be the optimal solution as it allows for true contracts to be created and could allow any transaction people would want to be able to proceed.
A Problem With These Solutions
It would be nice if a goblin in Stormwind could make a contract between two players, but how on earth could the goblin possibly be able to enforce the contract.
This is the main issue regarding contracts and is the issue that I will leave you all to think about. I'm sure Blizzard would love to be able to enforce contracts, but they simply do not have the manpower (or the tax dollars) to run a functioning court system. If you have any idea how they would be able to enforce millions of contracts in a reasonable fashion, please write it here.
I would appreciate if you could keep a civil discussion on this matter. It is something that I find interesting and I look forward to hearing all of your opinions on. Thank you.
Please note that this has nothing to do with the Annual Pass and is simply about the economics, and more specifically the lack of contracts, in World of Warcraft
For some time now I have been learning economics and finance in school.
One of the key points that is focused on is the idea of a Financial Contract.
The Financial Stuff (Scroll down for the WoW Stuff)
For those who are not aware of what a contract is, I have a definition courtesy of Merriam-Webster:
a : a binding agreement between two or more persons or parties; especially : one legally enforceable
b : a business arrangement for the supply of goods or services at a fixed price <make parts on contract>
Now, why are contracts important? Aren't they just for big banks? Aren't they complex and difficult to understand?
Contracts are what allow people to conduct business. A common example is buying a car:
When you buy a car, you make a contract with the car dealership to make payments at certain predetermined times in the future. This benefits both sides. The car dealership gets all of their money plus interest for the time it takes you to pay it and you do not need to spend a huge sum of money upfront to buy the car. Both sides benefit.
In this example, I only mention one contract. The truth however is that the salesman (and every other employee that works there) has a contract with the dealership, the dealership has a contract with each of the suppliers, and both the dealership and the suppliers have contracts with banks to provide them with the money they need to function.
At every step along the way a contract is being used to allow this business to provide a service that can be counted upon. If at any point a party in any of the contracts does not fulfill his end, the government can enforce it.
Here is another key word: Enforce
A contract that is enforceable means that it can be counted upon, so that both people who go into the contract know that it will be upheld. If either party does not uphold their side of the contract, they can appeal for the help of the government who will make sure that the contract is applied properly.
From the point of view of a business, the ability to enforce contracts is one of the main reasons for the existence of a government. By enforcing contracts, a government allows business to proceed smoothly. It allows people the safety of knowing that their investment is safe and their money will be repaid.
The WoW Stuff (Scroll down a little further for The Problem)
World of Warcraft(WoW) has a supply and demand economy like many economies do, but it lacks in one key aspect: the enforceability of its financial contracts.
Most trading in WoW is done through the auction house(AH). The auction house allows us the peace of mind, knowing that our transactions will be conducted safely and efficiently. It allows everyone to appreciate the benefits of a supply and demand economy. This allows the most basic of financial contracts to be carried out, a transaction in which the total agreed upon value of the product is exchanged for the physical product at the time of the purchase.
This contract is one of the most important, but it is also very limiting in its scope. It allows a person to buy an item if and only if they have the total sum asked for all at the time of the exchange. For very expensive items, this transaction scheme becomes unmanageable.
Here is an example of an item Chelley's Sterilized Scalpel that I'll say is going for 5000 gold.
Here are two ways that this exchange could be conducted:
1)
Person A: Selling Chelley's Sterilized Scalpel 5000 gold!
Person B: Buying Chelley's Sterilized Scalpel 5000 gold!
Person A sells to Person B through the trade window.
In the first case Person A receives the amount they wanted without having to go through any hoops. Both Person A and Person B are happy.
2)
Person A: Selling Chelley's Sterilized Scalpel 5000 gold!
Person B: Sorry, but I do not have 5000 gold at the moment, would you be willing to accept 5500 gold paid in equal payments every two days over the course of the next twenty days?
Person A: Sure
Person A gives Chelley's Sterilized Scalpel to Person B and receives 550 gold every two days, for twenty days in total.
In this case, Person B could not afford the 5000 gold all at once, but could afford to raise 550 gold every two days. In this agreement, Person A got 500 more gold than they were expecting and Person B got an item that he really wanted, but could not afford all at once.
The Problem
Blizzard does not openly enforce player contracts.
This line is devastating to people like Person B. People who want an item and are willing to pay for it, but cannot afford to pay upfront. It is also annoying for people like person A, who could get an extra 500 gold for their item, but are unable to.
In the terms of economics, the unhappiness experiences by both sides is called Deadweight Loss, a trade that could have happened, but is unable to due to market conditions. These trades not being able to proceed causes a negative impact on the economy.
While I gave an example of a single trade, there are many trades that go on every day in which a person is forced to sell an epic item for much less than it is worth. This causes a great deal of trouble to the person trying to sell the item as they don't want to spend a huge amount of time selling the item and yet want a large amount of gold for it.
In every trade where a person is forced to offer a significantly below market price for an item that someone would have paid market price for, a small amount of deadweight loss is created. This deadweight loss is experienced by the player-base in the form of being unable to sell items or being unable to buy items that they want.
We have all experienced this issue at some point or another in our WoW experience and it is a prohibitive factor affecting the economy we have all become comfortable using.
Possible Solutions
Now, I do not claim to have any remarkably profound solutions to this issue, I have a few possibilities which, while theoretically possible, would be difficult to implement.
The first possibility is already in the game: Blizzard upholds agreed upon loot rules in groups.
This is a relatively profound statement. Blizzard is saying that if players agree to distribute loot in a specific manner, Blizzard will honor their agreement.
Here is an example of how this can be used:
Say a group of people enter The Dragon Soul raid in 25-Player Heroic mode. After they conquer the earlier bosses, they finally reach the Madness of Deathwing. Unfortunately they have an issue. The guild members do not know how to distribute the mount that drops from the boss (Life-Binder's Handmaiden). This is a serious problem until one person steps up and says "I would be willing to pay 5000 gold to the guild every week for the next 10 months which will be given to the guild vault to provide enchants and flasks for raiders". The fellow raiders agree to this and will all benefit from it.
Blizzard now comes into the picture. If for whatever reason the looting agreement is not held, the item could be taken and redistributed to the group. Blizzard has been shown to enforce looting agreements in the past and this is no different. If the agreement is not held, the item will be taken.
Going through the looting system might be one way to get a form of a looting contract.
The second possibility is to provide people with an in game system to loan money.
This concept could be applied similarly to the Federal Reserve, which can sell government bonds or loan money to people depending on whether money needs to be taken out of or placed into the economy.
The in game equivalent of this system would be to place an NPC (almost certainly a goblin or a wind-trader) who would be able to lend money at an interest rate and would receive money from players that could be invested at an interest rate.
While not an optimal solution from the point of view of enforceable contracts, this would allow money to flow more freely through the economy and reduce the deadweight loss created by the lack of contracts.
The third (and final) possibility is an NPC who could allow two players to agree upon a predetermined payment schedule to pay for an item (or gold)
The NPC could allow the two players to list the days that money will be exchanged and the amount that will be paid on that day.
This would be the optimal solution as it allows for true contracts to be created and could allow any transaction people would want to be able to proceed.
A Problem With These Solutions
It would be nice if a goblin in Stormwind could make a contract between two players, but how on earth could the goblin possibly be able to enforce the contract.
This is the main issue regarding contracts and is the issue that I will leave you all to think about. I'm sure Blizzard would love to be able to enforce contracts, but they simply do not have the manpower (or the tax dollars) to run a functioning court system. If you have any idea how they would be able to enforce millions of contracts in a reasonable fashion, please write it here.
I would appreciate if you could keep a civil discussion on this matter. It is something that I find interesting and I look forward to hearing all of your opinions on. Thank you.