It's always interesting to me to see how our ideas and assumptions from the real world can wind up manifesting in the virtual world of an MMO.  In particular, there are a lot of similarities between real economics and the economics of a game world.  In general a lot of the same principles apply such as supply and demand.  There are many differences as well, but the basics are very similar and allow for making some comparisons and observations between the two.  In this post however I'm more concerned with the attitudes toward trading.

If you've spent much time buying and selling items on the auction house (and especially if you're a crafter) you know the term "undercutting".  It's a word that gets thrown around an awful lot, and often it's used as an accusation in order to condemn the player who did the undercutting.  The word is so overused in fact, it's a lot like crying wolf.  You've probably been impatient and tossed some item onto the AH without much regard for the recent prices.  Later on you get angry tells from someone else intending to sell that item accusing you of undercutting.  For some casual players this is a surprise, and  they may not even understand what the problem is.  Before I go any further lets consider what the word undercutting means.

Undercutting is a term that can be used in regard to any competitive trading in FFXI or in reality.  According to Merriam-Webster.com it's defined as:

3 : to offer to sell at lower prices than or to work for lower wages than (a competitor)

This is the way I understand and accept the term.  Basically undercutting is successfully selling your item for less than a competitor.  And so, due to competition, undercutting is the method by which prices decrease over time.  Undercutting promises the ability to buy more for less money.  Obviously then it's not the buyers or the successful sellers who have any issue with undercutting.  It's only some of the unsuccessful sellers who complain about being undercut.

It's important for a seller to understand they are in competition with everyone else who wants to sell the same item.  That is only one of the many different factors that need to be taken into consideration when you decide to sell.  And so essentially when someone tries to smear another seller by calling them an undercutter they just fail to comprehend how trades work and assert their own hurt feelings instead.  It's one thing to dislike not being able to sell for as much as you had hoped for.  Naturally everyone hopes to get the price they ask for and it sure sucks when it doesn't work out.  But it's important to accept the situation and not blame someone else for not getting what you wanted.

This point was perfectly evident recently after accumulating about 10 of the new Hecate's Capes from the Fiat Lux Campaign Ops.  Optimistically we had hoped to be able to sell them for a couple million each.  However as time went on the price continuously declined by more than 2 million.  Some friends began bemoaning the undercutters who so drastically destroyed their profits and cursing their luck.  In their view they had lost 2 million gil in profits.  That's a lot!  But of course it's also not true because the facts of reality had decided that a Hecate's Cape was no longer worth 3 million gil.  And no amount of complaining or disapproval will make it otherwise.

What's really interesting to me is that "undercutters" in real world economics produce the same kind of contempt as they do in a virtual world, and for the same reasons.  Any time there is a drastic increase or decrease in prices and stocks one of the first things that occurs is politicians will start to blame speculators and short sellers.  Short sellers being the equivalent of an undercutter in FFXI.  Short sellers sell their stocks temporarily because they expect that the price of that stock will wind up decreasing, while speculators buy stocks expecting them to increase.

In the news you will see this phenomenon a lot.  When oil prices rise, the evil speculators are first on the list of suspects.  And when financial stocks plummeted, evil short sellers were targeted by politicians as the reason.  Back in September of '08 the SEC even went so far as to ban any short selling of certain companies for a period of time.  And only two days ago Germany banned the naked short selling of certain financial institutions.

The core of the problem is actually pretty simple.  Both undercutting in an MMO and short selling in reality incite anger and frustration by the types who think their feelings are more important than the facts of reality.  That notion is something like this:

The initial price on a Hecate's Cape was 3 million.  But selling it for far cheaper makes me angry, and since my feelings are what matter I shouldn't have to do that!  I am due the 3 million that I expected!  Never mind the fact that hundreds of Capes have been produced since their release, and never mind the fact that the mission will be available again next week.  The people who undercut the price so much are just greedy!  They only wanted money for themselves quickly, they don't even care about other sellers!

The initial price on Lehman Brothers stock was $86.18.  But selling it for far cheaper makes me angry, and since my feelings are what matter I shouldn't have to do that!  I am due the millions that I expected!  Never mind the fact that they're massively over leveraged and no one wants to invest in them.  The people who sold off are just greedy and panicking!  The stock market is all based on appearances you know.  They only wanted money for themselves quickly, they don't even care about the other stockholders or employees!

Of course the implication being that short sellers or speculators cause prices to rise or decline.  Supposedly "panic" and fabricated rumors can manipulate stocks to their own advantage.  After all they're trying to make money, and that is highly suspicious and selfish!  But any of you who have bought and sold items on the auction house know that reality doesn't work that way.

Let's say that I devise an evil scheme to manipulate the price of the Hachiman Domaru.  I buy up every piece I can get and resell them to my own mule at an increased price repeatedly until my own sales are the only history.  Now I've made it appear as though a Domaru is worth far more than it was before, and ignorant new buyers may have no clue.  At the same time I begin circulating rumors and endorsing my love of the greatness that is the Hachiman Domaru.  Hopefully all this will change some attitudes and allow me to score huge profits right?


Obviously not.  Perhaps in the very short term I might sell one or two to buyers who just can't be bothered to look into it's value (Domaru after all...), but at the end of the day a Domaru is still a Domaru.  Eventually the brute facts of reality will reassert themselves and my scheming winds up wasting my time and money.  On top of that, now my bad choices have punished me and I have even less resources to influence the market in the future.  The undercutters who would be my undoing are the ones who wind up helping see to it that the objective value of the item is presented.  The undercutter makes money by comprehending that something is priced too high, the buyer saves money by getting a discount, and the attempt to price something unreasonably is punished.  It's justice all around.

However notice that no one rushes up to the auction house thinking "I want to help the community help find the proper price for this item".  That's ridiculous.  Much more likely a seller is thinking "I want to make money".  And there is nothing wrong with that.  Making money and helping to guide the price of an item to it's objective worth is one and the same.  Doing one accomplishes the other.  When two traders agree on a price everyone wins.

And so as you can see, undercutting (and short selling) are fundamental to an economy, in reality or in a virtual MMO.  Continuous competition of sellers makes items more affordable, and when the facts require adjusting they help find the new real value of a good.  These terms don't deserve the negative connotation they've been smeared with.  If certain people can't understand the risks involved and get over their own hurt feelings then that is their problem.  Both undercutting and short selling are a good thing and deserve to be recognized as such.