Dr. EJ on Economics - Part 2 | Just My Two Copper

Dr. EJ on Economics - Part 2

Posted by Markco at 8:00 AM

Now that there are a few less paupers in WoW, let’s make the princes even better off.
Today’s topic is the cartel. A cartel is essentially a group of individuals who control most or all production in a market. Often we see posts dealing with ways that you make gold on your own. This method however, involves not only a lot of start up money, but several trustworthy friends as well that you will have to work closely with.

The cartel works by collusion, that is, you and your friends predetermine what you want to corner a certain market at. You buy up any sellers and then resell everything at your set price. Quantities should be varied, but price per unit must be maintained. You must constantly buy up under-cutters but between the three or four of you, it shouldn’t be a problem, especially with a large gold reserve and open bank space.

Two important things are now working in your favor, one psychological, the other realistic. The first is this: when I look on the auction house and see all of an item is the same price with several different sellers and quantities, I assume it is fair value. The second factor is this: You have double control on the price. Allow me to explain what this means. As was stated above, you have direct control by actually setting the prices, but you also have indirect control by setting the quantity available in the market place. By limiting the number of auctions available to buyers, it keeps pressure on prices to stay high. You simply need to provide just barely enough for the buyers to ensure prices stay where they are. There should not be excess on the auction house and almost none of your posts should be expiring. If more than one or two are, you’re posting too much.

Cartels are not for those with weak stomachs. You need a trusted group of associates and some system of equalizing profits among all members. It can be a daunting task to set all of this up and disappointing at first when you have to invest so much gold and bank space, but it’s worth it in the end. The large investment is met with larger profits that can be maintained almost indefinitely. If you are a leader and can rally your peers into developing this business model, then go for it!

While there are obvious things to avoid with cartels (like infighting, individuals who sellout, etc.) there is one that is less obvious and can be the most destructive. Frequently, great success in one market makes people ambitious to reach out into a new market or maybe several, to turn the simple cartel into a giant conglomerate. DON’T do it! It already requires so much capital to corner and maintain one market; cartels will easily outstrip their cash reserves trying to expand. The result is a complete collapse in control and tremendous losses, and often the disbanding of the associates. You must be ever vigilant to maintain your market, because others are always trying to call your bluff. If you ever don’t hold all the cards, you will get hammered into the ground.

So there you have it, two days and two great applications. While many of Markco’s tips are usable by everyone, occasionally the blog will focus on smaller but still important groups. There’s a little something for everyone: the rich, the poor, and anybody in between. What more could you want?

Loremaster Ej

10 comments: on "Dr. EJ on Economics - Part 2"

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Unknown said... February 17, 2010 at 9:24 AM

I have a question about all this. Its all fine if you have 4-5 good friends on the games, but I have 2 problems. first is I have only one on the game and second only I am interested in the market at all.

I am thinking about forming a guild for gatherers, to get some people to farm and pay them. whats the best way to go about this?
Euripides said... February 17, 2010 at 10:49 AM

I don't agree. Cartels are nice in theory, but the classic prisoner's dilemma applies. The most personally profitable path for every member is to follow the group's directions with their main, but break all the rules with an anonymous alt. So lets say one of the rules is that half the (let's say, glyphs) belong to one player, and half belong to the other. If one of the players sticks to their boundaries with their known auctioneer, but posts all the glyphs on their alt, they will gain more than if they just stuck to the rules.

Cartels in real life work because it's harder to create shell companies to hide your business. In the game, however, it's trivial.
Zeran said... February 17, 2010 at 11:52 AM

Warning: Incoming Walls of Text

Not to rain on your parade Ej, but I think that you're really just offering to feed the goblins.

The first problem of a cartel is the entrance barrier to a market. That is to say that Johnny down the street doesn't (and never will) have the financial backing to build a powerplant and provide electricity to the neighborhood. Therefore, he cannot compete with the local electricity company for their market. This entrance barrier is all but non-existant in WoW.

I personally know a few people that have farmed and ground Inscription, Jewelcrafting, Enchanting, Blacksmithing and Leatherworking to cap. I laughed at them because I know easier ways and hate farming, but anyone (with the time) can bring their crafting to cap and compete.

Since there is no entrance barrier, you're always going to have someone entering the market to compete this raises the issue of controlling supply.

You suggested buying out all of the goods that are under your set price point, and reselling at a higher price point. This is the actual problem the goblin (deep undercutter) brings to you. Yes, by camping the auction house to buy out his goods just after he posts them you prevent the prices from falling. However, he just sold ALL of his goods for a profit. Can you guess what his next move is going to be when he logs in again?

Exactly, he's going to craft more of them and post them all again. So since you bought out all 4 of his glyphs of every type he's going to post 6. When you buy out all 6, he'll post 8. When you buy out the 8, he'll post 12 . . . and the cycle continues until he cannot sell them all, which is to say you're out of gold.

Furthermore, in any market that is worth the time to set up a cartel of multiple skilled sellers, there is another type of character. The AH Camper, and he (at least during prime time) sits at the AH waiting to be undercut, and immediately cancels and reposts when he is. If you do not undercut him, but rather buy him out then he immediately posts more, again barely undercutting your pricepoint. This leads to either A) an undercutting of 1c war, or B) you buying all his wares for 1c less than you're selling yours for. In every market, except enchanting, reposting 1c more expensive is a loss of money (due to posting fees).

The only way for a cartel to work in WoW is for the cartel to contain ALL crafters, or have unlimited funds. Neither of these are actually possible as new crafters are always coming along, and no one has unlimited funds.
Zeran said... February 17, 2010 at 11:52 AM

Personally, I would LOVE for a cartel to come to my markets and attempt to raise the prices. I will happily sell them all my wares at a decent profit margin, so that they can continue to attempt to control the market.

A final note, the other issue you didn't mention, which is often brought up with the Cartel idea, is the control of the Raw Materials used to produce the product(s) of the market being controlled.

This again is a ridiculous idea. There are far too many farmers out there for you to purchase all of their wares, and at a certain point it becomes profitable to recruit/convert farmers. This is to say, that guildie that still doesn't have epic flying on his main, but is leveling a druid (herb/alc) would gladly be willing to take the 8kg now it would take to get both epic flyers in return for farming up 10-12k worth of herbs. Especially since it will be faster and easier for him to get the herbs if he has the epic druid flight. Furthermore, it's more beneficial to him as he can keep the secondary ones (i.e. frost lotus or crystal life if your making glyphs). This makes his farming beneficial to him, and paying off his debt in a quick manner so that he feels he's a productive member of the social group (the failing of the anti-social goblin is to abandon social engineering as a useful method to procure the desired results).

On a final note; assume (despite the actual difficulties/impossibilities) you had a successful cartel. What happens next? In the real world, Governmental intrudes into the business world (anti-trust lawsuits [a la Microsoft] or governmental regulations [electric companies]). In WoW, the government is more subtle but just as influential since they can alter the physical laws of how a raw material is produced (the Sellers family in Dalaran). This alteration further opens up the market to new intrusion (Cartel in the Leg-Armor market? ok off to BT to skin everything there and buy the furs to compete, or hey lets just pay our skinners for heavy borean leather).

TL:DR (for the lazy) Cartel's don't work when you can't kill your competition.
Anonymous said... February 17, 2010 at 2:30 PM

"The cartel works by collusion, that is, you and your friends predetermine what you want to corner a certain market at. You buy up any sellers..."

Exactly why I love to compete against a cartel. Guaranteed sales.
Zamboni said... February 17, 2010 at 4:00 PM

Now, if you want to have a little fun breaking up a cartel, check to see if they're selling anything with a "made by" tag on it.

If they do, buy a few and sell them late at night at a discounted price from a fresh alt with a suspicious name. If you're lucky, other cartel members may suspect one of their members of selling items outside of the cartel or exceeding their quota, and the ensuing drama may rip the cartel apart.

I broke up a gem cartel once by buying and reselling gems from all three members, and all three then accused each other of violating their quota agreements. Every night I would sneak in a few more auctions, and eventually they turned on each other in a free-for-all that collapsed the market.
EJ said... February 17, 2010 at 10:06 PM

In response to many of the comments, there are three things to keep in mind.
First, as I originally stated, you need several close friends that you can trust implicitly to make this work. Those are hard to come by but eliminate any internal issues.
Second, a cartel always selects a market with average or above average turn over, that is, goods are sold at or above the average rate of all goods exchanging hands among buyers and sellers. If someone wants to try to undercut you, then let that person do it. You will resell it for a higher cost soon because of a steady demand. The issue of someone trying to flood the market with cheaper goods is dealt with from your very high cash reserve. Even if they continually undercut you, the cartel has an extra card up its sleeve. Temporarily, any business model that is monopolistic in construction (a cartel is technically an oligopoly) can engage in predatory pricing. YOU undercut THEM. You must ruthlessly crush any competition you come up against. This may mean losses in the short term, but in the long run you will win out. Undercutting them forces them to either leave the market right away, or they try to stick it out, until you sell below their profit margin and they then leave. Again, in the long run you will win either way.
Thirdly, the article said you need large cash reserves, close associates, and a strong nerve to pull this off. Perhaps I did not stress this enough. It is really hard to make and run a cartel. I mean really hard, but the payoffs are definitely worth it in the end. If you pick an extremely aggressive market, you may need five friends with one hundred thousand gold each in reserve to start and maintain the cartel. It takes a lot: gold, trust, time, vigilance, and patience; but there may not be anything else in WoW that has so high a rate of return. It can catapult you from rich to gold capped. This article was written for the very few groups that can pull this off in the game.
As a side note, the cartel in WoW has a major distinction from the cartel in the real world, so we can't draw too many parallels. The WoW cartel doesn't actually produce anything. They are buying and selling, but not farming, milling, tailoring, transmuting, etc. The oil giant OPEC produces a product in the real world; they are not buying and selling refined product, they just drill and sell the crude. Remember that the WoW cartel is not designed to be the producer, but a middle-man as it were between the producer and the final user.
Zeran said... February 18, 2010 at 2:19 AM

There's one Final problem you failed to address EJ. That is the difference between WoW and the real world. I don't have to pay rent/taxes/anything to store my goods until your price point comes back above my profit margin.

Thus, I can keep you forever loosing money with my alt that sits at the AH. There are even addons (promoted by this site) that can be configured to prevent me from selling at a loss.

Assuming I have the addon configured properly, all it takes me is a 5minute quick check to make sure you're not making money. Thus the contest of will is how long you can keep loosing money before you have to back off.
Markco said... February 18, 2010 at 9:11 AM

Unless you have been part of a successful cartel (I have) you really shouldn't say it can or can't happen but rather look at the possibilities. I will say that infighting and people going off on alts to take advantage of the system is a real threat to the cartel. Also, these one man super humans posting all day long, there are ways around them. The goal is to make sales, not force every retarded goblin out of the market. Need to define your definition of success people.
The Don said... February 24, 2010 at 1:13 PM

I really don't see the point of a cartel in an online game. Its not like a pharmaceutical cartel, where if you don't have that medicine you'll die, you can simply go without and save yourself some gold to spend elsewhere.

There's not a single item in WoW(or most MMO's for that matter) that is required to be possessed in order to succeed. To make things easier, yes, but a requirement of being able to play? No.

There are two types of cartel's, one that prey's upon an actual need for something, and a second that prey's upon a constructed and percieved need for something. The second requires ignorance on the part of the preyed market. Education can destroy that cartel.

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