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Thursday, April 7, 2011

Opportunity Cost of Free Items





Opportunity Cost of Free Goods

Yesterday's post - An Opportunity Cost Case Study - brought some good comments, but I want to bring one comment to the forefront.

"What if your opportunity cost however is free. Like let's say you get Hostess or someone to donate all the goods to you and then sell them for profit. Would it matter less if you sold them for a complete pittance of their actual value, or would you be justified since they were simply handed to you? 
This is the dilemma I recently faced. One of my competitors quit the game recently and gave out a lot of his stuff. He gave a large amount of gold and items to random people in trade for doing miscellaneous tasks, but to me he unloaded guild tab upon guild tab of old world items. (He hadn't playedsince cata came out so all the stuff normal people unloaded at the end of wrath he had stored up in excess) I passed on some of the items to others, used some for leveling my alt professions, and was then left with just unbelievable stacks of things that in small amounts are great sellers, but on my server (which is microscpically small) I was skeptical would ever be unloaded in any timely manner if I were to sell for some of the current prices.  
So, I thought to myself, does it really matter if I undercut everyone "normally and get full market price, or do I simply just want to unload some of it quickly. I chose the latter option and figured since it was technically free, that I could utilize the overinflated prices of what some sellers had the items going for, to kind of help sell mine. Like even if people did not need or want this item, it would show up on their add-ons as a must have for resale profit cuz mine were so far below the current selling price of others. 
I was right, a good portion was bought up by one of the other sellers, and I noticed some of the names who bought some were back up relisting them, but the amount of whispers I got from annoyed people was absolutely astounding. lol and I am still left with incredible amounts. There is probly 101 different ways I could unload some of the stuff other than selling the mats raw, I could have crafted things, or crafted and de'd and in the case of the cloth I did craft like a thousand bags and saved the rest as bolts. A lot of it simply came down to laziness on my part. 
Anyways, at the end of the day I started to wonder if I was being as bad as the people I always talk shit about, "but my mats were free cuz I farmed them!" I mean technically I would argue but mine truly were free, though the end result seemed to be kind of bad, because I left the market oversaturated on some things and am also still left with a large amount of overstock."
 -Skorpsy
Free Goods

 Let's start off by clearing something up first.  "I farmed it so it's free" is wrong because there is a serious time commitment involved in farming or grinding for items.  So when you are farming it's not free.  Farming costs you time.  Time that could be used making more gold elsewhere.

Goods that are gifted, donated, grandfathered, etc. are truly free goods.  They cost you nothing - no time commitment, no gold, no effort.  Therefore they are truly free goods.  They took a little of your time to collect, sort, and post but they are free.

How to price these truly free items is the dilemma as was mentioned in the comment.  Technically you can price them at whatever price you like, even deeply undercutting, because they will be pure profit.  You paid nothing, so any price will be profitable.  If you are deeply undercutting, then you are costing yourself the opportunity to make more gold on the items.  If you simply just want to turn these gifted items into gold, then feel free to post them for whatever price you want.

If some of the items that you received for truly free are also items you sell on a regular basis, then you really need to be careful.  If you flood the market with them and rampant undercutting ensues, you may crash your own market and could be costing yourself much more gold over the course of the devalued pricing period.  Remember to not flood a market and only post a few items at a time at a slightly under market value price, if you want to get a nice return without devaluing the items by flooding.

Who else wants to comment on the opportunity cost of free goods?

8 comments:

  1. I think there is 4 reasons why I would sell at a lower price in general:

    1. I need the money desperately. This can't ever happen on my normal server. Even if I saw this wonderful offer, that I couldn't pay for with my stack, it would be too risky to sell everything in a hurry just to buy that (aka all eggs in one basket). It could for some reason be applied to another server, where I'm not as rich.
    2. I'm producing more items than I can sell at the current price. This could apply to glyphs. Lets say that the cost of a glyph is 20 g. I could perhaps sell 2 a day of a given glyph for 150 g. That would make me (2*150)-(2*20) = 260 g. If I perhaps sold it at 100 g instead I could sell 4 a day it would get me: (100*4) - (4*20) = 320 g a day instead, netting me 60 g more. I'm sure most scribes have been in that situation.
    3. I have a huge stockpile of soon-to-be outdated mats. This could be rare gems, if epic gems are to be released. While dumping isn't the most exciting of options, it's sometimes necessary.
    4. If for some reason I end up with goods that has a time limit, before it "goes rotten". This is probably the one mentioned here. There's a time limit on 30 days for all mats in the mailbox. It might seem manageable, but if you get sent the motherload from a competitor (like 10-15 guildtabs), there's no way you'll be able to stockpile it for later, especially if it's old world mats that sell at a slow rate.

    All in all I don't buy the argument that if it's truly free, then it's ok to sell at a lower price. Being a goblin is all about maximising profits within reasonable time. It's not efficient to sell cheap unless you have a very good reason to. There might be other scenarios than the four I listed, if you have other examples, please list them.

    And for the record, I really like this series. It's thought provoking.

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  2. While you’re correct that farmed goods are not truly free, the bigger point is missed: how much you paid for the goods is irrelevant in determining what to do with them.

    It doesn’t matter if someone paid a lot or a little for the goods because those costs are sunk. Once you have the goods, the only question is how to maximize your utility from them prospectively, not retrospectively, and the original acquisition price (or lack of price) shouldn't matter.

    The statement that, for goods received for free, “any price will be profitable” also misses the issue of true opportunity cost and muddles accounting profit vs economic profit. If someone donated the Swift Spectral Tiger Mount to you, would you sell it for 2000g and walk away saying “well, I’m so happy! 2000g pure profit!”? Of course not, because the mount is worth 100k+ g, so selling it for below market is leaving money on the table. The same analysis applies to any other good.

    It can be rational/goblinish to say “I value my time, and spending X minutes will probably increase the sale price by only Y gold; that’s not worth it, so I’ll dump the goods at sure-to-sell prices.” Likewise, it can be goblinish to not want so spend the time/effort to convert goods into crafted goods for sale. But it is not goblinish to say “Well, I got these goods for free so any price is fine.”

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  4. Opp cost is not costprice, they are two separate and distinct concepts.

    Your cost price is based on the price you paid for the materials you need to sell / craft something.

    Opp cost is a fictional cost you use to express the financial difference between a set of options you have in order to maximise your profit.

    Sell now, at this rate A, or later at a "possible higher rate B? the difference in cost is that you have to pay storage cost for your materials so it only makes sense if rate B >= rate A.

    Another example, i bougth elementium ore for 75g a stack, do i prospect it or sell them as bars? The bars sell for 200g stack. Meaning that if i decide to prospect the opportunity cost of that is an additional 25g. I "could" have turned those ores into bars and sold them for 100g worth.

    Deciding to prospect i end up with 5 uncommon gems and a brilliant inferno ruby. Whats that ruby worth?

    Market price says 90g. i can also cut this into a delicate inferno ruby that sells for 75g, what do i do?

    The cost price of that gem was 30g, ( 75 - 5*9 ) so either option is valid. You won't make a loss selling it as a cut regardless of the current market price of 90g for the uncut gem. The moment you decide to cut it, you are simply accepting a 15g opportunity cost that lowers your max profit. You "can" potentially sell this gem at 90g, but chose to sell it at 75g instead.

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  5. another addition, contrary to popular belief, opportunity cost doesn't cover time spent, on crafting, mailing, posting in the ah.

    Those things are all part of your cost price, they just get confused with farmers farming their own mats. The time spent is separate from the opportunity cost, but in that specific instance happens to be equal to it aswell. The actual opportunity cost is i "could" have sold these ores in the ah for xx money.

    And since thats usualy the only option farmers have the reward for their time equals that amount obviousely.

    Something to consider on the topic,

    Unloading slowly at market price carries an opportunity cost aswell, you're "paying" for storage.

    Either in bank slots that are filled and could be stocked with for instance Pyrite to take advantage of the possible epic prospects comming from them.

    Or in sending mails between alts, ( in time spent doing this and the mailbox fees )

    next to that it would require you to unload slowely, adding aditional time to your ah routine for a long period, all time that you would not have spent in the unload fast scenario, meaning its additional opportunity cost and must be considered when making this desision.

    It sounds counter intuitive since in the previous post i listed all of those things as being part of the cost price, and they are, since they are real cost. However, when considering a future endeavor, such real cost are listed to the opportunity cost price aswell in order to determine the financial gain of such an endeavor.

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  6. There is no such thing as "free" opportunity cost. If you can read, your opportunity cost is positive. Zero (free) is what you paid for the item. That's something completely different.

    Opportunity cost is your "next best" alternative to whatever choice you're about to make.

    For example, since I can average 3,000g per hour doing a variety of things, selling ports at anything less than 100g (say it takes 2 minutes to conduct a port transaction) doesn't make sense. I'm better off doing my usual thing than get frustrated by people who think paying 20g is highway robbery.

    As to the poster's issue of what to do with something given to you, consider this. If someone gives you a dollar, you got it for free. Would you give it to someone else in exchange for 10 cents? That is basically what you're talking about.

    If you've been given 100K worth of items, sell them for 100K. You might have to dribble them out, but selling them at a fraction of market value makes no sense.

    Now, back to basics here, if the benefit you'll get from painstakingly selling items at market value is outweighed by what you could make doing something else, then *bingo*: move them quickly. Your opportunity cost is too high to mess with price discovery, storage, mailbox meddling, and relisting.

    However, @Fex - unless you're out of bank slots, the time cost of grabbing mail / storing etc. relative to the additional money to be made by selling slowly is very, very small, imo.

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  7. ^^^

    The problem is that whether they are free is completely and utterly missing the point and and should have no impact on how they are sold.

    Primordial Saronite is not worth a single copper more if you paid 3000g for them or 3g. The items have no memory. Would you try to sell the 100k of goods for more if you paid 200k for them?

    In the book "Looking out for #1", the author said that he knew a property was overpriced when the seller told him what it cost. What it cost is irrelevant.

    You may want to dribble items out to keep from tanking the market; you may want to dump them. But these are tactics. You can do what you like with your real or virtual money but selling something for any less because it is free is bad economics. If you do this, then please make sure you never have to make decisions for real companies.

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  8. From the last sentence of the last comment... let's look at real companies (I have one irl, and I'm pretty good at playing the ah in wow).

    IRL, real companies definitely do sell off old/excess stock at a fraction of the normal price (and sometimes at a loss) just to get it out of the way. In a way you could say that "old stock" is free stock, since they've made such an enormous profit off of the other stuff they've sold, but that's a moot point.


    There were valid points made about storage (not really an issue in wow, just create another alt and/or another guild) and mailing (not a serious issue, either, as postage is essentially (and unrealistically) free, too).

    So, there are two factors I see that really matter:

    1) the ratio of labor to value and
    2) expenses that actually exist in the world of warcraft (the only one that actually effects anything is the deposits spent when posting auctions).

    A real company isn't going to hire a bunch of salesman to go around and push old slow-selling product; they are just going to sell it off (liquidate it) for a fraction of it's original price and devote their sales force's efforts toward selling newer more profitable and faster-selling product.

    In the same way, the AH goblin has to decide if he wants to liquidate the product or commit himself to the labor of selling the product for full value.

    The best solution:
    It seems to me that the things that have negligible ah deposit expenses can and should be sold over time for maximum profit, and this can be handled with various existing add-ons without much extra exertion of labor.

    Slow selling items that have high deposits should be liquidated (sold for a fraction of their current value as quickly as possible) through trade chat, or to an ah competitor for as much as possible via an alt. This is true whether you paid nothing or a lot for a given item, and this is how successful companies in the real world do things (albeit their direct competitors probably won't be interested in buying their old stock whereas in WoW competitors may be lured into doing so).

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