Summoning the Calvo Faerie

I recently noticed that my main ammo type (Trauma Heavy Missiles) almost doubled in price in the past two weeks, from 44ISK to 77ISK. I knew that recently the price of Tritanium had risen to over 4ISK. (Think over $4 gas.) But the rise in material price has been going on for about 2 months and really just now the price of ammo is jumping. In thinking through this problem I stumbled upon a model of downwardly sticky prices that does not rely on adjustment costs and has more of a prisoner's dilemma feel.

In the setup there are many identical firms and consumers. The firms buy raw materials and convert them into finished products which the consumers buy and consume. The wrinkle is firms post sell orders with prices and quantity available. Consumers purchase from these orders and can buy partial quantities. Then if there is a sudden shock to the raw materials, one would expect that prices would immediately rise to be profit maximizing given the now higher replacement costs. The problem is if you are the only producer to adjust your price upward, you lose on sales until the current market orders expire. If there is a cash flow constraint on the producer side then having to wait on sales would harm current production, completely disrupting the firms profit flows. And because the firm doesn't see enough other firms changing their prices, the firm chooses not to adjust due to these disruptions.

It is true that their are implicitly costs of changing the price and production plan, but they are more part of market equilibrium than firm structure. The key components to this model are the structure of market orders and the credit constraints. Relaxing either would cause prices to adjust immediately. There also needs to be some assumptions on speculator, namely they are not big enough to affect the market, and probably a credit constraint on consumers as well. The other problem is I am not sure what market in the real world has this structure. Any ideas or critiques of the model?

Technological Change and Inflation in EVE

The latest patch for EVE Online added some new battlecruisers. The production of these new ships and modules for the ships has increased the demand for Tritanium. This is the basic mineral in the game and essentially every item is produced using it. The increased demand has caused the price of Tritanium to rise, which causes the price of everything else to rise in game. Essentially there is inflation caused by the resource requirements for a new technology.

The effect of the inflation is asymmetric across professions. Mining has become more profitable as its end product has a high demand, but there has been no shift in mining technology. Though the fixed cost of entering the profession has risen due to the general price rise. This increase in fixed cost is true for essentially all professions. Mission running, Wormholes, and complexes appear to be less profitable due to the increase in both fixed costs (ships, rigs, and modules) and variable costs (ammo). Further a negative wealth effect on these professions and PVPers decreases demand for the rewards of these professions. Finally, the bounty and mission rewards have not increased with the inflation, decreasing the lucrativeness of this profession.

For producers the effect is ambiguous, but probably positive. On the negative side, the production materials have a higher cost. Further there is a fixed cost to entering production of the new ships from the blueprints & research. But these new items have a high demand and, as ships take time to produce, the producers can discriminate on price by charging the early buyers more, forcing those with a lower valuation to wait.

Granted all of this is dis-equilibrium dynamics. Until the supply flow of ships matches the flow demand of ships there will be inflationary pressure. Once there is a large enough stock of these new ships, the market will be able to settle into a new equilibrium as there is no time-demand friction.

Bots and Mechanization

One part of MMOs that most players find boring is the repeated gathering of resources known as farming. The tasks are repetitive and very formulaic In most cases they could be done by a computer program, or bot. The innate tension of these tasks is resource farming tends to be central to the in game economies, like ore in EVE Online, but bots tend to be hated by players and against the game EULAs. Essentially the developers and fellow players are try to force people to do the routine tasks necessary for the economy to function even though there is an automated way to accomplish the same goal.

This situation is completely dual to the issues surrounding mechanization in the real world. Every time machines replace workers there are always those who object even though it increases the efficiency of the system as a whole. This frees up labor to be used in other ways and for a wider variety of goods to be produced. In the modern world the progress of mechanization tends not to be inhibited by governments because in the long run it improves the situation of everyone.

The question is why, even though these situations are dual, do games not use the real world solution. I think there are two reasons for this. The first is, unlike the real world, games are finite. There are no new products or technologies unless the developers add them. This limits the quantity and variety of activities available. Hence letting the players restrict this further by using bots is harmful as the rate of new activity innovation is slower than the real world as there are fewer people who can bring new things into the world. Second, when people play an MMO, they expect to be able to interact with other players. Having some avatars be computer programs when people are expecting humans harms the social aspect of the game. This is why many EULAs forbid bots even though the real world analogs are beneficial.