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By: dragonmage65, Nick Matthews
Jun 25 2008 12:29pm
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Introduction:

Economics is the study of the use of scarce resources which have alternative uses.
     - Lionel Robbins


First off: my salutations to you, reader, for having the good guts to click on this particular article. This is the first column of what looks to be a multiple-part series. I will not be exploring deck ideas or card interactions, as I have in the past. In fact, this column will make no mention of gameplay strategy at all. Instead, my energies shall be focused upon examining the basic economic principles and theories that make Magic Online what it is.

It is my sincere hope that you will find this series to be both enjoyable and understandable. I will be writing strictly to the lay person’s level of understanding - you will not need to have taken a college economics course to understand the essential message. Indeed, if you have taken such a course, you may find this series to be regurgitating, to some extent. But all the same, I hope that it will serve as an educational tool for those who are interested in the subject matter.

That said, we’re ready to begin.

 
I’m a liberal, thank you very much.

 
  Adam Smith is my homeboy.
Yes, folks, I will freely and unabashedly confess to being a liberal. I think that Barack Obama is the coolest thing on the planet; it’s simply tragic that my spellchecker declines to recognize his first name without underlining it with a squiggly red line.

But why bring up politics? I do so to dispel a particular misconception that a reasonable person might infer about my beliefs. I am a liberal (and proud of it). But I am not a leftist. It is important to make that fine distinction.

In the United States, the most obvious suitor for the leftist label would be Obama’s Democratic Party. Leftists lean left (wow!) on both social issues and economic issues. Social issues are mostly irrelevant to this discussion, but economically, leftists tend to support heavier state intervention, higher taxes, and policies which attempt to serve as equalizing forces in the free market. At the far extreme is a state that literally dictates everything.

Classic liberalism, the school of thought to which I prescribe to, is a different animal altogether. Liberals believe in laissez-faire economics - strict free markets with little to no interference from the state. Liberals also believe in upholding certain unalienable rights, including the right to free speech, to practice religion, and to own private property. In short, liberalism is about the individual and his or her rights.

As always, if you want to learn more about a topic I only briefly touch upon, Wikipedia is a good resource to consult.

 
What the hell does this have to do with MTGO?

Like many other trading card games, Magic Online, for all intents and purposes, operates its very own self-contained (for the most part) market economy.

Merriam-Webster Online Dictionary defines a market economy as being:

    An economy in which most goods and services are produced and distributed through free markets.

Certainly, Magic Online does not fit this rather broad definition perfectly. For instance, the cards are not designed or produced through free markets. There is only one manufacturer of said goods - Wizards of the Coast. Such an establishment may appear to run counter to the principles of free markets, as one particular corporation holds a total monopoly over the design, production, and firsthand sale of the products that are at stake. Indeed, in this case, the private corporation itself is the state - an illogical and impossible arrangement in real life.

Recognizing these facts, I will concede right away that Magic Online is not a true market economy. However, it comes pretty darn close, and that is sufficient for our purposes.


Prices and the Secondary Market

Now, then, the production of cards and product lies entirely within the hands of Wizards of the Coast. However, the distribution of these goods is where the magic (no pun intended) of the free market economy begins to happen. In Magic Online, the most familiar venue for the distribution of goods is known to us as the secondary market.

Wizards operates on a highly sound business strategy - it offers a variety of sealed products, but does not sell individual cards. For the free-market capitalist and casual player alike, this is a very good thing, because it means that Wizards is not arbitrarily setting the prices on the cards it manufactures. This also means that we can consider the secondary market to be the primary source for individual cards.

Prices are perhaps the single most important strength of free markets. Prices act as tools which convey important messages to the distributors of the market. The distributors in this sense are not limited to dealers and bots - they include everyone who engages in trading activity on any formal basis. Prices act as representations of supply and demand - they convey a sense of “value” as a function of its availability.
 
 
Supply and Demand

Supply and demand is the fundamental principle of economics. In any trading card game, supply and demand work to assign “values” to particular cards. It is the natural aim of any price to seek equilibrium - an intangible point where supply and demand are balanced. If any one side loses or gains weight, then the price must in turn shift up or down to reestablish equilibrium. In free market economies, this equilibrium is capable of shifting with rapid speed.

Supply and demand is also why rares in general are worth more than the vast majority of their common counterparts. The demand for a particular card is obviously related to its overall strength and desirability. Demand can fluctuate in Magic Online. But because the Wizards of the Coast has fixed the production figures of the three rarities (Editor's Note:  Four Rarities, since MaRo insists we include Basic Land as one, and five as soon as Mythics enter the game), the ratio of supply will always remain the same - you will always be able to find more of a particular common than a particular rare from the same card set, regardless of card strength. Thus, even a junky rare will be worth more than a moderately playable common. Of course, the occasional high-powered common will buck this trend - especially if it sees frequent tournament play.

Supply and demand is also the principal culprit for the usual drops in prices of fairly recent sets. When Shadowmoor was first released, prices for individual cards were fairly high, as the relative supply of cards was quite low. However, as time progressed, more and more cards began to pour out onto the open market. As more and more players became satisfied by their respective hauls of the newest set, demand stagnated across the board. Combined with increased supply, the inevitable result was a drop in value. In this case, prices conveyed an important message - the initial peak demand for Shadowmoor, as with most past sets, was short-lived.
 
 
The Fallacy of Prices - Exposed   

Vindicate
 
There are many who view prices as barriers to obtaining the things they want. Those who wish to obtain four copies of Vindicate, for example, may abandon such plans when they realize how expensive that particular chase rare is. But a high price is not the ultimate obstacle to preventing everyone from having four copies of Vindicate. The reality is that there are simply not enough copies of Vindicate to go around - its high price is simply a way of conveying that underlying reality.

On the other end of the spectrum, a new player who wishes to sell a Prodigal Sorcerer Avatar will be entirely unable to do so. He or she may not realize that the five default avatars are included in every account, and as no one has any need for multiple copies, there is simply zero demand for them. Thus, their real value is always zero - and it is for that reason that they are marked untradable by Wizards.

In the same manner, if Wizards were to exercise its ultimate authority and magically spirit four copies of Vindicate into every account, the card would immediately have a net worth of zero - and while many would celebrate their good fortune at having obtained a playset of a high-powered, (formerly) expensive card for free, there would be many angry players who would rationally feel cheated out of their money. What good is an extra playset of Vindicates when everyone else has four of them, anyway?

Thus, the “God Account” scenario - where Wizards would cease selling product and instead charge a monthly fee for accounts with four of every card - would annihilate the secondary market. Magic Online would cease to be a trading card game.
 
 
The Distributors

The distributors are essential to any economy, free markets or not. Without distributors, no product would ever find its way to the market, and in a TCG like Magic Online, such a scenario would spell instantaneous destruction for the brand. Fortunately, the term “distributors” is all-inclusive. Dealers, bots, and average players are all considered distributors in the open market.

In free market economies, it is essential that distributors be able to communicate and execute transactions with consumers. Without such interaction, no purchasing or selling could ever occur. Wizards does a decent job of promoting such interaction - but that is a topic for a later article.

Magic Online is highly unique in that the distributors are also the purchasers. Distributors who attempt to obtain some degree of profit as private entrepreneurs often find themselves purchasing (at lower prices) the same cards that they are selling. One can certainly find this in real life, to some extent. For example, a grocery store will purchase milk from a dairy farm, mark up the price, and then pass the same milk along to the consumer. However, what makes Magic Online different is that the consumers - the players - take the place of the dairy farm.

This is phenomenon is due to the second-hand nature of the market. You would never see a grocery store purchasing milk from a customer in real life, as a customer would never logically have the means to manufacture milk. But in Magic Online, cards maintain their mint condition. They can be traded an infinite number of times and still retain their full value. Players are not manufacturers, but they can come up with cards that are essentially as good as new. Indeed, because commercial distributors themselves, such as MTGO Traders, are not the manufacturers (excluding, of course, Wizards of the Coast), they must rely on other means to obtain profit.

Dealers and bots find their profit margins by serving as middlemen - they capitalize on the willingness of the consumer to trade a better price for greater convenience. When it comes to a card game like Magic Online, time is typically more valuable than money, and it follows that an individual player would not bother spending six hours to obtain the best price.
 
 
Greed
 
Greed
There are many who choose to blame high prices on greed. Such players often speak of a particular card being sold for more than its “real” value, much in the same way that people choose to complain about the rising price of energy. However, to treat prices as being a result of greed is to say that distributors - sellers, if you will - can direct prices wherever they wish, regardless of supply and demand. True, sellers prefer to get the highest possible price for their products, both in Magic Online and in real life. But it is equally true that buyers usually wish to pay the lowest price they can for goods. This is why you will find a discrepancy between the buying price and the selling price of any particular card.

 From a liberal perspective, we should avoid damning greediness as being “bad”, despite the term's negative connotations. One must wonder, where is the line between “reasonably profitable” and “greedy” drawn? Without a clear brightline, determining exactly where “greedy” begins becomes an arbitrary task that is left to the whims of an irrational, emotionally-driven response.

In fact, I will argue that “greed” is good. Greed in the form of rational self-interest is what ultimately drives the innovation that makes free-market capitalism so successful. Without greed, Magic Online would not exist.

“The point is, ladies and gentleman, that greed -- for lack of a better word -- is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms -- greed for life, for money, for love, knowledge -- has marked the upward surge of mankind.”

    - Gordon Gekko, in “Wall Street”


Conclusion:


Thus, we conclude the first article in this series. I sincerely hope that you found it informational. Remember, the above is not unabridged - that is, it does not delve into everything, but for the purposes of a casual audience, I believe that it is sufficient. Feel free to sound off in the comments section. Am I a genius? Am I a dolt? Did you not understand a word I wrote? I want to hear your thoughts.

Until next time, good luck, and have fun.

- Nick

11 Comments

by Anonymous (Unregistered) 90.195.164.240 (not verified) at Sun, 06/29/2008 - 08:03
Anonymous (Unregistered) 90.195.164.240's picture

You seem to have a misunderstanding in your beliefs. Specifically with classic-liberalism and Adam Smith. He was for state intervention in the economy and identified the ability for markets to fail. What you're in favour of is Neo-Liberalism, Hayek, Friedman and company and the Austrian School. What many call the "bastardization of Adam Smith". Moreover, the juxtaposistion of democratic social programs and Neo-Liberal Hayekian free-market ideals is an oxymoron. It's a fundemental misconception of what the two schools of thought believe and what they entail. I think what you mistake as "liberalism" is simply simple microeconomic beliefs which are universally accepted by everyone, including democrats who have adopted Keynesian economics for the justification for social programs and social democracy as a whole.

Overall, this is a very simple article which is patronising of everyone's understanding of supply and demand. It is verbose and superflous for such a simple topic with absolutely no practical examples in terms of actual cards and their fluctutations. My advice to you is to only write this article once you've actually finished learning Economics or have interesting data to share. Otherwise, Hamtastic's graphs can say one hundred times better what your long-winded paragraphs try to describe.

? by DRAGONDUNG at Thu, 06/26/2008 - 11:05
DRAGONDUNG's picture

Politics probally is not the best way to intro a new Column though the writing was done well.  Its just way too easy to insult and help people find some fault with your article.  I would have like to see the article dig into some of the actual reasons and practices for pricing on MTGO.  Maybe next time, was entertaining just would like to see content with hard data to back it up.  I am sure if you ask Hammy he would be glad to give you some data so you can back up your theories.

O'Reilly by Stu Benedict at Thu, 06/26/2008 - 16:21
Stu Benedict's picture

I don't agree with anything that Jon M. said, but jumping to that lame, overused O'Reilly blast is weak. Most people that do that never even sit down and listen to him. It's just something that the left is supposed to say.

O'Reilly is fair to both sides. He hates the far left, but he hates the far right just as much. He has stuck up for Obama the last 3 days on his radio show. In this age of media bias, why bash one of the guys that is just presenting the unbiased truth?

by AJG (Unregistered) 155.91.45.232 (not verified) at Thu, 06/26/2008 - 09:56
AJG (Unregistered) 155.91.45.232's picture

Hold on, so rares are generally worth more than commons because, wait for it, they're more rare?  Wow.  You would have been better off just cutting and pasting dictionary definitions.  Wait, you already did that.

 

The articles on this site that are readable are few and far between.  State Of The Program, Standard Deviations, and the occasional Classic piece are pretty much all I can stomach.  Please keep your politics out and more intelligent fare in.

by Anonymous (Unregistered) 24.11.48.180 (not verified) at Thu, 06/26/2008 - 09:50
Anonymous (Unregistered) 24.11.48.180's picture

Looks like someone just finished there first year Econ 101 class.  Thanks for explaining supply and demand...I didnt get it until you put it in MTGO terms.  Sarcasm.

learn to open your mind and close your mouth :) by Jon M (Unregistered) 76.108.129.128 (not verified) at Wed, 06/25/2008 - 14:49
Jon M (Unregistered) 76.108.129.128's picture

 "Yes, folks, I will freely and unabashedly confess to being a liberal. I think that Barack Obama is the coolest thing on the planet; it’s simply tragic that my spellchecker declines to recognize his first name without underlining it with a squiggly red line."

 

 

 

I thought only morons are for larger goverment/higher taxes and affirmative action. I'm pretty sure you never excelled in economics or common sense(thats why you're a liberal). Its completly liberal of you to complain spellchecker doesnt recognize hussien's name. In case you didnt realize hussien's name isnt in the dictionary(because its a muslim name). Try watching something other than MSNBC(thats in the tank for obama), like most of the media. I really implore you to read some conservative/republican books to atleast see both points of view, such as: Liberal Facism by Jonah Goldberg.

dragonmage65's picture

You amuse me. Try reading the whole introduction before you go all Bill O'Reilly on me for a change, yes?

by khirareq at Wed, 06/25/2008 - 15:09
khirareq's picture

Just wanted to say I enjoyed the article and am looking forward to more!  I would love to see an economic rebuttal of Hammy's Wizards vs Spike article.  Also on the different demand aspects of the different psychogenic profiles, and how they contribute to card prices.

by mtgotraders at Thu, 06/26/2008 - 08:16
mtgotraders's picture

Liberals believe in laissez-faire economics - strict free markets with little to no interference from the state. Liberals also believe in upholding certain unalienable rights, including the right to free speech, to practice religion, and to own private property. In short, liberalism is about the individual and his or her rights.

Oh gosh there is a liberal aritcle up on my own website!  Funny read even though I am a conservative and disagree with the above paragraph as far as liberalism goes.  Conservatives are just as bad these days as we are no longer for small government anymore and are just as corrupt.  Obama is just another Nixon/Clinton as far as i'm concerned and his recent move to withdraw from public financing just goes to prove it.  I wish Colin Powel had run I would of voted for him in a heartbeat.  Anyways good article anyways and please don't attack dragonmage just because you diagree with him.

 

Madhornist's picture

Micro-economics, like a closed secondary market (MODO) is pretty well understood and an article written to that effect really doesn't relate to modern American politics.

The overall economic infeasability of your MODO investment retaining much value would be a better topic to cover.  The WoTC draft machine, a.k.a Magic Online is remarkably efficient at flooding the market with cards because of the overly egalitarian 4-3-2-2 queues.  

If all drafts were 8-4-0-0 fewer players would drive the secondary market and demand would be higher across the board.  It might even be worth buying booster packs JUST to crack them.   Rare drafting would be more popular and there would be more reason to trade casually for deck-building purposes.  There also might be fewer drafts running, which would help the community focus on casual, multiplayer and PRE play.

There would be a substantial reduction in supply and digital prices might start to approach paper ones, which would be good for the secondary market vendors like MTGOTraders and their unnamed competitors.

 

Also, its considered poor journalistic style to have a long-winded and ultimately irrelevant lead-in paragraph.

just food for thought.

 

 

??? by Anonymous (Unregistered) 72.4.249.2 (not verified) at Wed, 06/25/2008 - 13:17
Anonymous (Unregistered) 72.4.249.2's picture

This can be an Economy 101 first term paper graded with a C- ;) You forgot to add APA stle references buddy... Fun to read anyways.