Auctions: Theory and Practice

Auctioneer Addon for WoW

Our lectures and literatures discussed the theory of auctions. World of Warcraft (WoW) is an online game that was discussed earlier in another post. It has is own virtual economy with an auction house system that uses an ascending first price sealed bid system. Items are placed in the auction for a price determined by the seller with the option of setting a ‘buy out’ value that buyers can immediately purchase instead of waiting for the bid to close out. Bidding for the item can be placed for eight, twelve, or twenty-four hours. At that time, potential buyers place bids on the item raising the value until either the time runs out or it reaches the buy out value.

While each buyer in the game may have their own value that they are willing to pay for an item, is it possible for the seller to intentionally change the value to gain more profit? WoW has interesting add-ons that are developed by individuals that can provide a variety of features that can make a difference playing the virtual economy. One popular add-on is called Auctioneer. It allows a user to scan the auction house and display the average value of an item that has been scanned before. It is quite popular that a huge majority of players that use the auction house has become accustomed to using it to find out if something is worth bidding on or buying out in the auction house. This coincides with Klemperer’s theory that those with information advantages will gain more profit than those that do not.

I wanted to manipulate the auction house with the information that I knew others used this add-on to determine their own value of the item. For two weeks I scanned the auction house and it saved the values of all the items that were constantly put up for sale. I found the item ‘essence of air’ was always on sale at an average bid and buy out of around 8 gold (Gold is the virtual currency of WoW). There was usually a few of these on auction simultaneously. Purchasing all the items on the auction house for their value of 8 gold, I replaced them back on the auction for 15 gold. I announced in the trade channel the price of the item and was usually told by random people it would not be purchased because they were not worth that much value. Each day I scanned the auction house and bought out others that were placed cheaper and replaced them with ones valued at 15 gold. The first few days, nothing was bid on or purchased. After the third day, a few finally sold at the value of 15 gold. I raised each of the prices from 15 to 20 gold then eventually 25 gold slowly over the time of a week. Within that time, buyers now started bidding and purchasing the item at the overset value. I stopped placing the item to see if the values would drop back to their low price originally, but instead others now placed the same value when trying to sell theirs also. While multi-unit auctions theories are still in its infancy, the behavior is similar to what Klemperer described that buyers and bidders end up ‘colluding’ and coordinating their own behavior whether unknowingly or not. It is interesting to see that the virtual world and economy of an online game still follows many of the same rules and theories.