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Thoughts on Diablo III's auction house

Reasoned predictions on the economic intricacies and implications of the upcoming Diablo III auction house system.

Making up my mind on the upcoming Diablo III auction house system, I'd like to start off with the "pay to win" argument. First and foremost, I'd agree with the D3 devs that the game is primarily a co-op game. The developers have clearly stated that they deem D3 at most as a casually competitive game, meaning they don't monitor the PvP balance very closely, not at all as close as their e-sports flagship Starcraft II. However, I would not support Blizzard claim that people will purchase items for real money out of pure altruism, to "help your buddies kill demons faster ... not buying an advantage as a selfish measure". From my point of view, the primary motivation for users to purchase items will be hedonism, the right to brag about cool items to friends, and not to help them. This does not cater to the "pay to win" aspect, but rather to overall materialistic pleasures, i.e. "having the bigger car, the larger house, the more beautiful wife, and the better Diablo III gear". If materialistic pleasures should be the primary motivator for playing any game is a matter of both personal taste and another blog post...

There are, of course, also numerous other motivations why a user would want to purchase an item in the Diablo III auction house. One being speculation, playing the money / trading game. There will be users almost exclusively playing the money game. They will try to generate revenue from short-term speculation, monopoly prices, price discrimination, "buy in the morning sell in the evening" price elasticities and so forth. This will have an impact on the prices regular players, those who just want to play the game for relaxation after work / studies / dinner for 1-2 hours in the evening, will have to pay for real money based item sales - in a negative way. Plus the various consumer psychology driven implications an auctioning system has with users oftentimes investing more money than they initially wanted "just to win the bidding game" etc. Anyone who has ever used Ebay or the WoW auction house in the evening being short on flasks for raiding should know what I mean.

Participation in D3's auction houses will require one out of two resources: gold (further called IGC, short for "in-game currency") or credits (further called RMTC, short for "real money transaction currency"). You may wonder why I call the elsewhere spoken-of "real money" only "credits". Only when a user specifies that he wishes to convert the funds generated by an auction house sale into real currency via the (yet unannounced) third party service (PayPal et al.), the user will be able to access those funds for any means outside of battle.net. The conversion from "battle.net credits" into "real money" will always come at a cost and it will only be available when specified as such prior to the actual sale. Always using this option will be economically inefficient for users that plan to, in any shape or form, continue to use the D3 auction system. There will always be exit barriers and costs for users who want to earn money via the D3 auction house. Entry barriers to use it will be both low and even incentivized via the auction house system ("Man, my last real money sale got me $5 worth of battle.net-exclusive credits but that sword costs $7.5, I better load up my account with a few more bucks!").

Blizzard of course claims that players do not have to use the auction house at all and that there will also be a purely gold-based auction house, i.e. an auction house that is mostly (while not purely, as players will still be able to purchase gold via credits) ... that is mostly based on time invested into the game. Blizzard CM Bashiok claims: "I have no doubt that the gold auction house will by-far outweigh the real money auction house in scope and amount of items available." I'd support that theory fully: the gold-based auction house will have tons of items in it. Tons of low- to medium-quality items. Anything that users will deem valuable enough to be purchased for real money, anything "of quality", will be available in the credits-based auction house, and in this auction house only as the quality of the currency "battle.net credits" will be far superior over the quality of the "gold" currency as well as the quality of items players can purchase in the two different auction houses. My prediction would be that players will mostly use the gold-based auction house to try to get an additional bargain over selling items to vendors, to purchase "intermediary items for leveling up" at low prices, or to acquire low quality items via their "main" characters to push the NPC progression of their "alts" / secondary characters. Because of that, I'd also presume according implications for the exchange rate for credits into gold.

Blizzard claims that the market will be fully player-generated and fully driven by player supply and demand. While it is true that prices and price elasticity will be largely influenced by the playerbase, it is also true that Blizzard specifies the drop rates of items, the income curve and progression of players in between the different available levels, the % chances for item stats on crafted items, etc.

Last, the Diablo III developers state that they are implementing the auction house system to legalize and control third party sales. Personally, I doubt that they will accomplish that goal. Players will be able to just meet up in a game and exchange an item. This transaction may not only be based on pure altruism and friendship, but also on a mutual agreement determined via an exchange of real money funds prior to that in-game meet-up. In that case, they could even circumvent the fees (listing fee, sales fee, and credits to real money conversion fee) associated with the usage of the official Blizzard service.

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