the only haven you can trust

Every so often, someone posts in our forums asking why our auction house system doesn’t allow you to see the actual listings and their prices. I don’t respond to these posts as much as I used to, and when I do respond it’s generally to say ‘I’m not going to explain the AH mechanics again.’

I’m going to go ahead and explain them now.

The first thing to realize is that the AH mechanics are based on those in Final Fantasy XI. Whether or not you believe their economy worked (and I don’t think it did, particularly) their auction house worked, and worked close to perfectly. I always preface any explanation of the auction house with this, because inevitably there’s someone who has only been exposed to the WoW auction house, and asserts that a blind bidding system could never work in practice.

So here’s how it works: Anyone can list an item for any price they like. The (non-refundable) fee paid to the auction house to list the item is based on a percentage of the price the user chooses to list at.

Users coming to the auction house can see, for each type of item, the number present in that auction house and the last 10 prices paid for that item. We also offer a few additional historical data points — a 30 day price average, for instance — but those are basically just elaborations of the core system.

To purchase an item, a user offers some amount of money. If there are any listings at that amount or less, the user successfully purchases the item for the amount he offered, regardless of the listing’s price. The specific listing he purchases is the one with the lowest listing price, even though he never sees that price and doesn’t pay that price.
The person who listed the item gets the amount offered, regardless of the actual listing price.

So why do I do it this way? There are a lot of smaller reasons, that I’ll get into in a moment, but the central unifying principle is that players are not rational economic actors. Which is to say, players of games do not interact with a game economy in a way that economic actors in the real world interact with a real world economy. Nor should they; the things a player of a game values in the context of the game world are only tangentially related to real-world values.

For instance, in a game with a limited inventory, players will value their inventory space, potentially at a higher value than any item in their inventory. In a game that allows a player to generate cash restricted only by the time invested, players will value their time at a defined level, and any less-efficient use of time will be greatly devalued. In a game with experience points, players will value any activity that generates experience points. And so forth; players assign value with the intent of optimizing their game experience, and any game economy functions only insofar as it serves to optimize the game experience.

Unfortunately, this means that game economies are often frustrating for both players and designers, in that they showcase behavior that seems incomprehensible and destructive. For instance, it’s not uncommon to find items in the WoW auction house that have been listed for less than what they’re worth when sold to an NPC merchant. That means a player had to go through the multi-step process of listing an item in the auction house, and will receive less reward than if he had just sold the item to the inevitable nearby merchant. We can speculate as to why he did that — perhaps he was already in the auction house interface, and just listing everything he didn’t want from his inventory for arbitrary low prices, because he values his inventory space far more than the maximum possible reward he could receive for the item. Perhaps he values his time highly enough that it’s overall less rewarding to research the NPC merchant prices of each of his items. Perhaps he’s undercutting another seller, in hopes of selling his item first, with the expectation that there are few buyers for that particular good.

Whatever the reason, the result is the same: other sellers of that good are now unable to sell without lowering their price below his. For a high-demand good, this is not usually a problem; even listings with higher prices will eventually move. But for a rare or low-demand good, a single person undercutting your price will cost you a sale. It will cost you a sale because you cannot compete on any axis other than price; your item is identical to your competitor’s item, and there is typically no substitute the buyer might choose instead. If you need the Leaves of Wrath to build your Engine of Doom, most games will not allow you to substitute the Stems and Pieces of Wrath because the price is lower, or substitute the Nameless Fruit of Wrath because the quality is higher. The buyer can see all the prices, he knows all the items are identical, and so he has no motivation to buy anything but the lowest-priced item.

it is fairly common in WoW to list an item for, say, 5 gold, and set off an undercutting war that will result in someone selling the item for less than 2.5 gold. There are even third-party tools that automate the undercutting process for you, so that you don’t need to do even the simplest math to participate in this war.

So this is where I come in. I care not because I think the outcomes of the WoW economy are bad — they’re perfectly fine for the gameplay of WoW, and they adequately serve the perceived needs of the players. But, in much the same way that we designed a complex ship combat system, I spent a lot of time thinking about a complex economic system. The reason is the same in both cases: versimilitude. We believed that no-one would be interested in an Age of Sail game in which the ‘Sail’ part of the game wasn’t believable. Similarly, we believe that an economy that feels like a ‘real’ economy is necessary for setting believability. I’ve got to solve the problem of players-as-irrational-actors to sell the economic gameplay of Pirates as an approximate model of the real world.

There are a lot of design decisions behind the overall system, more than I can reasonably go into in this post. The auction house, however, was a key part of the system. Here’s some of the ways in which it addresses the issues above.

Reduced downwards price pressure. Undercutting in WoW provides a downwards price pressure; as each person undercuts the next, the overall price declines over time. In the blind AH, each person is undercutting from the same known last sale price. If a typical player is willing to undercut by 10% to make a quick sale, all typical players will undercut to the same price point, instead of each of them further reducing the price by 10% below the last listed price. Players are undercutting a ‘good’ price, at which the item has actually sold, instead of undercutting a ‘bad’ price, at which the item has not yet sold.

Incentives to keep prices high. As you undercut in WoW, you reduce your potential reward. If you list an item for 1g, you will only receive 1g when it sells. You therefore don’t care about the prevailing rate; it matters only insofar as it may determine whether your item sells at all. In the blind AH, typical purchases will happen at or near the prevailing rate, regardless of your actual listing price. You therefore have an incentive to keep prices as high as demand will allow, and so do all other sellers of the same good. Undercutting is a statement of priority, rather than a statement of value.

Punishment for undercutting manipulation. Inevitably someone argues that players will ‘exploit’ this system by listing items for 1 doubloon, and therefore always sell before anyone else. This does, in fact, happen — and it’s not an exploit. There’s a built-in punishment for this behavior, in the form of other players looking to make easy money. Trolling the auction house offering 1 doubloon for every big-ticket item is perfectly legitimate; it was damn near an industry in FFXI. Pricing your goods ridiculously low is fine, as long as you’re willing to accept the risk that you may receive ridiculously low compensation. Since there’s no mechanical difference between a lowest-priced item at 90% of the going rate and a lowest-priced item at 10% of the going rate, your only reason to prefer the 10% rate is if you believe all other sellers are undercutting to near that rate. If all other sellers are doing that, the going rate is probably way too high in any case, and will adjust downwards.

Buyer’s value assignment is independent of seller’s value assignment. In WoW, a buyer’s ability to assign value is limited to selecting from a set of price points assigned by the seller. If I don’t agree with those price points, I have no ability to set my own price point. In the blind AH, I don’t select from a menu of sellers; I assign my own value independent of the sellers. If I believe an item is worth 1000 doubloons, I can offer 1000 doubloons regardless of what the sellers have asked for. If there is a seller who (at least) agrees with me, we’ll complete a transaction, and I will have asserted my valuation in a somewhat permanent way — that transaction will be recorded. Remember that markets are an aggregation of individual decisions about value; if your decision isn’t even recorded, it can’t be aggregated except insofar as the seller will probably offer the item for that price again. No other seller or buyer will be able to act on the information implied by your decision.

Sellers have an incentive to price above the market. Every seller would like the market price of an item to rise, if possible. Sellers who value time more highly will undercut, but sellers who value cash more highly will increase their prices in hopes that other sellers will follow suit, or in hopes that the demand will exceed the supply. In FFXI, it was common for buyers to strip an auction house of zinc ore. Knowing that every night the Japanese players would log on and empty the auction house of zinc, I could easily price my zinc at 150% of the daytime market rate. All the cheaper zinc would be purchased first, but as long as my price was a reasonable estimate of the demand, all my zinc would sell overnight as well. By counteracting the downwards price pressure that is an inevitable outcome of the WoW-style auction house, the blind auction system allows greed to do its work to exert an upwards price pressure — a pressure that will drive prices up to the highest level that demand can consistently support. As well, the blind auction system rewards all sellers if just one seller can raise the price.

Buyers can choose the degree to which they value their time. A common argument I hear in response to this system is: Won’t this force everyone to start bidding at 1 doubloon, and incrementally bid 1 doubloon higher until they find the lowest-priced item and pay that amount for it? My simple and only somewhat facetious response is always ‘Well, have you done that yet?’ The answer is always along the lines of ‘No, but it’s theoretically possible.’

Consider: I work across the street from two grocery stores, and down the street from a 7-11. I can easily walk between all these stores. This means that before making any purchase at any of them, I could walk between all of them and price-check the purchase, only buying the lowest-priced item. And yet I never do that and the average person would probably agree that doing so would be insane. This is because the time I would spend walking between stores is far more valuable to me than the marginal savings I might realize by doing so.

Players who argue that they’ll have to bid up by 1 doubloon increments every time never seem to actually do so, for the same reason. Their actual behavior is typically a lowball bid — say 50% of the market rate — followed by something around 90% of the market rate. After that, they always jump to the market rate. This isn’t speculation, it’s actual log data. Nobody has ever bid up by 1 doubloon at a time. Not even once. In fact, the last time I looked at the data, the largest number of bids I saw before the user finally made a succesful purchase was 5.

Where people make those gradual increases is in big-ticket items, as you might expect.  You wouldn’t buy a car without doing some amount of price comparison; you might even drive back and forth between several dealerships looking for the best deal.  In that case, you’re likely to save hundreds if not thousands of dollars, and you value the afternoon you spend driving around at less than hundreds/thousands of dollars.  In the blind AH, you can do the same valuation of time versus savings; the prospect of saving 1000 doubloons on a 500,000 doubloon purchase will certainly get me to make a few more lowball offers before I start offering the market rate.

Knowing only quantity insulates the market from race conditions.  A ‘race condition’ is one in which two pieces of input are racing towards the same server ‘destination’, and the behavior of the system will be unpredictable based on which piece of input arrives first.  In this case, we’re talking about someone buying an item out from under you.  More than once in WoW I’ve made an offer, only to be told that the item was already purchased.  In order to minimize this, WoW has to re-query their auction house database constantly to keep the listings fresh.  In the blind AH, ‘the item was bought out from under you’ appears to be identical to ‘the only item in the AH is priced higher than your total cash reserves’.  We never need to snatch items out from under the user’s mouse cursor.  The user isn’t making a purchase of an item — he’s making an offer in hopes of finding a listing that is within his price range.  If the last item was purchased out from under him, the message we give is still literally true: ‘There are no items available at that price.’  The functionality is essentially the same, but without the feeling that you are racing against other players, or that your UI is lying to you.

I won’t claim that the blind auction house is the perfect market system for all games, or even the perfect market system for Pirates.  I’m just a game designer who thinks about economics sometimes, not an actual economist, and I’m pretty far from some kind of super genius.  All that said, I’m pretty happy with the theoretical implications of this AH system, and with the practical outcomes I’ve already seen in both FFXI and the Pirates beta.