Suppose you are teaching economics at a large university and want a new way of getting the interest of your students. It occurs to you that a substantial fraction probably play World of Warcraft. It also occurs to you—since you too play WoW—that the game contains a complex economy that poses all sorts of interesting questions for an economist. You announce a new course—WoW economics—and get a gratifying large enrollment. Now what?



WoW has markets and prices, including an auction house with many buyers, many sellers, and a wide range of products for sale. Prices are readily observed—starting prices, buyout prices, relative prices at one time, changes over time. Actual sales prices are a bit harder, but if your students are active players they are probably buying and selling things and could be persuaded to keep track of prices paid and received and make the information available to the rest of the class.



Consider one simple puzzle—relative prices of ore. Low level players mine copper, higher level iron, mithril, thorium, … . What determines relative prices? One’s first guess might be that prices are higher the higher the level of the ore; a high level player can mine low level ores but not the other way around, making the potential supply higher at the lower level. And higher level ore is used to make metal used to make weapons and armor useful to higher level characters, who typically have more virtual gold to spend.



It sometimes works, but not always. One reason is that ore is a joint product. Some players may spend their time wandering around in search of ore to mine, but a lot of ore, I suspect a majority, is produced by players who are wandering around killing monsters and doing quests, happen to see a vein, and mine it. As the population of a server accumulates more and more high level characters, more and more time is being spent wandering in high level areas with high level ore, producing an increase in the supply of adamantium, a decrease in the supply of copper.



What about demand? High level characters need high level gear made from high level metal, so one might expect demand to shift in the same way as supply. What complicates that is the process of skilling up—becoming a better and better smith (or jeweler or leatherworker), able to make better and better stuff. Before you can make swords out of mithril you must first make them out of iron, before that copper (I simplify, as any WoW enthusiast will realize). If your high level character decides to take up smithing he must start at the bottom. Even if he himself is a miner, he is not spending his time in the low level areas where copper is mined, so goes to the auction house instead—bidding up the price of copper.



Patterns of prices change over time, sometimes in comprehensible ways. Not long ago a new option opened up in the game, a type of character that got to start not at level 1 but at level 55. Your brand new level 55 Death Knight fights like a level 55—but if he takes up smithing it will be at skill level 1. The effect on the relative prices of low and high end ore and metal is left as an exercise for the reader.



For a second example of WoW economics, consider the opportunities for arbitrage, both across goods and across time, and the implications thereof.. Any miner can, at the cost of a little time, convert a lump of iron ore into a bar of iron, or a bar of iron and a lump of coal into a bar of steel. The result should be a predictable relation between the market prices of lumps of ore and bars of metal, or of iron, coal and steel. You can look on the auction house and see if the pattern holds. Similarly, any predictable pattern of price changes over time—some things being more expensive on the weekend, say, when more players are online—should open opportunities for enterprising players to buy low, sell high, and make a profit. The result of players doing so should be to raise low prices, lower high prices, and eliminate the pattern. Does it happen?



There is no antitrust law in WoW, which makes it a good place to observe collusive behavior by sellers. My wife, who spends more time in the auction house buying ad selling than I do, has observed both an attempt to corner a market and an attempt, at least partly successful, to form a cartel—a cartel she was invited to join. Her refusal was met by a threat to drive her out of the market by underselling her. The organizer of the cartel had apparently not read Aaron Director’s analysis, reflected in McGee’s classic article on the myth of predatory pricing; it had not occurred to him that if he was selling, at an artificially low price, ten times as many gems as the interloper, he was also losing money ten times as fast. It took only a few days for him to discover the flaw in the strategy and abandon it.



These are a few examples I have come across of economics in the World of Warcraft. It should not be hard to come up with enough more to fill a quarter. If anyone wants to try it I will be happy to offer more suggestions.



