I am nerd, hear me roar

So, I play Massive Multiplayer Online Role Playing Game (MMORPG) World of Warcraft (WoW, for short). This game is nerdy and addicting, so I am all about it. This game is based on two factions, the Horde and the Alliance, completing missions and fighting each other. As a person's character (an avatar, if you will) completes missions, kills monsters, etc he/she gains levels and gets cooler weapons, spells, abilities, etc.

I’ve taken my WoW nerdiness to a new level: the economics of a Netherweave Bag. A bag, in WoW, is like any other bag, it is something you carry items in. A Netherweave Bag is a 16 items bag: one can carry 16 swords, flowers, pigs heads, etc in this bag. It is one of the best bags for an avatar to have.

How does one get a Netherweave Bag? Great question! One’s avatar must have tailoring as an ability, build up that ability to a high skill level and have to appropriate materials to create the bag, or buy it from another player. The materials to make a bag are bolts of Netherweave and rune-thread. Bolts of Netherweave are made from Netherweave cloth and rune-threads are bought from vendors. It takes 24 Nethwerweave cloths to make the requisite number of bolts of Netherweave, and 1 rune-cloth to make these nice bags.

Gee, Brian, that’s great, but that’s nerdiness that is inherent to the game, how do you increase the nerdiness level? Another great question! It is all about how much one can auction the Netherweave Bag for, and how much it costs to make one. (Quick side note, money in the game works as follows: 100 copper pieces = 1 silver piece, 100 silver pieces = 1 gold piece, pretty simple) The costs of making a bag are as follows: a rune-thread cost 42.5 silver, netherweave cloth either costs the time to kill enough bad guys to loot 24 netherweave cloths, or purchase 24 netherweave cloths from other players at the auction house. Now, I choose to purchase the cloths from other players, and I usually pay between 12 and 15 silver pieces per cloth. Doing simple math, that means I spend between 3 gold, 30 silver, and 50 copper pieces; to 4 gold, 5 silver, and 50 silver pieces per bag. The nerdy part comes in when I acution the bags for between 5 gold and 50 silver pieces to 7 gold and 90 silver pieces per bag.

How is that nerdy? Well, for no more than the quick couple of minutes it takes me to purchase the material, create the bags, and send them to auction I make between 2 gold, 19 silver, and 50 copper pieces profit, and 3 gold, 87 silver, and 50 copper profit. I realized that there is a mispricing between the cost of the materials, and the price people are willing to pay for the bags. This pricing scheme give anywhere from a 66% to 117% profit margin; this has to be making economic profit. A 5% to 10% profit margin could be seen as a just recouping the cost of capital; but at the stated profit margins: marginal revenue is much greater that marginal cost. I theorize that it is because the people who auction off the Netherweave cloth are under pricing their goods. I, and the others who auction off the bags, are consistent about not going under the 5 gold, 50 silver price for the bags; so while the price of the bags might be high, not enough competition has come in to drive prices down; so the mispricing must be on the component side. The price of the rune-thread is set by the system (the vendors are Non-Player Characters, NPC’s, who don’t change their prices and have an infinite supply) so the only variable is the netherweave cloth.

I am King Nerd, because not only do I play the game, and make gold making these bags,; but, I get a HUGE kick out of charging and getting paid too much for the services rendered. This is not a true arbitrage situation, but it feels just about as good as one.

Later,

B, the Big Nerd