So we had a brief correspondence with Tobold and he asked a very good question concerning WoW deflation, a topic near and dear to our hearts. We put together our best attempt at tackling this huge subject and, on his suggestion, will share that answer with you now.
He initially asked, well…it’s a great question so let’s just leave it in his words:
“One economic subject I’m particularly interested in is deflation, because it is very visible on all WoW servers since WotLK came out, and somehow counterintuitive if you consider that making gold has become easier. If we are all swimming in gold, why is there no inflation? I’ve seen various explanations, but every blog has a different theory. Care to share yours?”
Which provoked the following response* from the WoWenomic team:
First off, great to hear from you! Deflation is an excellent subject and something we’ve covered before in several ways. One of our first posts dealing with deflation was our Northrend Economic Assessment- Part One. The point of that post was not necessarily to explain why deflation occurs but rather to prove that it is, indeed, occurring.
The other aspect of deflation that we frequently see in all MMO’s is the concept of MUDflation. When we first started turning our Wall Street eye upon WoW’s economy we uncovered this phenomenon so frequently that we actually added the term to our Terms page. We’ve mentioned it frequently in several posts and will continue to do so as we consider it a fundamental part of the WoW economy.
To answer your question more directly, in response to what is our theory as to the cause of deflation we would argue that it is several factors at work:
1) The concept of MUDflation is at work within WoW. As mentioned above, we’ve got a brief explanation of this on our Terms page but it is explained in much more detail over at Wikipedia.
2) We’ve all become a bit more keen and aware of the gold-making metagame. If you’ve made it to level 80, and been around the Azerothian block a bit as many of us have at this point, you probably have a few preferred methods of generating gold that you didn’t back in the ‘old-school’ days. Sure, it is easy to jump to the conclusion that more gold-making means more inflation as opposed to deflation, but when you consider that most of the methods that players have discovered for generating wealth involve selling items to one another, it is easy to see why items across the board are losing value: more items for sale means lower prices. Put another way, supply continues to increase at a rate faster than the rate at which demand is increasing. This is, in fact, quite close to the textbook definition of deflation.
3) Similar to our current real-world global economic crises, item prices were inflated to begin with. When WotLK came out, everything was overpriced. Now, we hate to use the term overpriced because the ‘real value’ of an item is whatever someone will pay for it (a phenomenon covered briefly in our second ever post). It will come as no surprise to any veteran WoW player that prices are inflated at the beginning of any new content patch or expansion but it still bears mentioning in terms of explaining the ‘why’ and ‘how’ of deflation. Since items were vastly overpriced to begin with, prices are not actually deflating now- Prices are simply normalizing.
4) Effective gold sinks- Blizzard is learning about the economy just like us. They have, for the first time since the game was launched, started including much more effective gold sinks. Initially there were virtually no developer-generated gold sinks in the initial game outside of those created by other players. The only developer made gold sinks- let’s call them PVE gold sinks- in the initial game were training, repair costs, auction house fees, flights, water/food and the big one at the time: level 60 mount training. Sure, there were many player crafted (or PVP) gold sinks but nothing stands out as a high cost, must-have item in terms of PVE sinks. Towards the end of the life cycle of the initial game Blizzard introduced a means by which you could upgrade your dungeon tier gear by turning in certain expensive items to an NPC in capitol cities and subsequently completing dungeon runs in the first versions of ‘hard mode’ (e.g. the infamous ‘Baron 45’ runs). This represents a turning point for Blizzard in several regards. First, it was arguably the very moment that the concept of ‘hard’ or ‘heroic’ mode was born. And secondly, with the turn-in requirement part of the tier upgrade quests, it represents the first time that Blizzard realized that they needed to continually add and/or upgrade gold sinks to manage inflation. The big gold sink built into the release of the first expansion pack, The Burning Crusade, exemplifies this maturity. This gold sink was so huge and significant that I’m sure I don’t have to explain what it is but I’ll do so anyway: Epic flight for roughly 5,000 gold. This was a major turning point for Blizzard and it was a fairly effective way of removing gold from players and returning it to the game (a PVE gold sink by definition). Effective as it was, Blizzard later learned that one, single, humongous gold sink would not be enough to continually fight inflation (the point of PVE gold sinks) by the end of the life-cycle of the first expansion. This is why, late into the expansion pack, we saw the introduction of a many purchasable mounts from several different factions.
At the very end of the cycle we see our first evidence of Blizzard’s current gold sink strategy: the NPC Haris Pilton. This marked another corner turned for Blizzard in that they moved away from their previous model of having only used mounts for PVE gold sinks. That is, they introduced novelty items to players that cost a significant amount of gold aside from mounts. We can see evidence of this new strategy in the current expansion pack where we have rings, spell icon cosmetic upgrades (for mages), additional stable slots for hunters, expanded bank tabs, expensive BoP items that can be bought from reputation vendors, and, of course, even more very expensive mounts. Note here that even the motorcycle could be considered a PVE gold sink in that the bulk of the cost of the materials is generated from the mats that must be bought from a vendor, not another player.
One might even argue that by making secondary skills such as fishing and cooking much more enticing to players (easier, faster and more rewarding) Blizzard has created yet another effective PVE gold sink in the form of training costs for skills that were previously not considered ‘required’ by the average WoW player.
5) Lastly, and similar to item number two above, there are more and more of us leveling through the content (and doing it faster than ever before) further increasing supply. Many hardcore players are now leveling, or have already leveled, an alt to level 80. Granted these players will need some gear and may purchase some of it from other players, they are also leveling their alt’s skills and thus producing more than they are consuming (the introduction of vellums for enchanters stands out as one example). Here again, supply is simply increasing faster than demand is increasing.
In summary, the reasons that we are seeing deflation despite the fact that more and more players are gaining in-game wealth are several:
-Supply is growing at a pace faster than demand across the board.
-The Mudflation phenomenon is at play.
-The prices to which we are comparing were inflated to begin with and thus are now normalizing.
-Effective economy management on the part of the developers- Blizzard has introduced more, and more effective, gold sinks.
I’d like to add that, on a personal note, I think that this only speaks to the brilliance of Blizzard’s game design methodology. They have found several effective ways to stabilize the WoW economy without the player feeling like they’ve been cheated. Other MMOs have introduced ridiculously priced items with the possibility to then lose these items (see EVE Online) or even in-game casinos (in which we all know the house always wins).
I apologize for the overwhelming length of this response but you’ve asked a big question and our team felt it deserved a big answer. That said, we could go on and on when talking finance (WoW or otherwise) and invite further dialog with you should you wish.
Thanks again for giving us a look.
Jederus and the WoWenomics Team
So what are your thoughts? Why are prices on a slow but steady decline? Do your agree with our assessment or do you have your own theories?
*Note: our posted response has been edited slightly for length and clarity.