[aqme28]

I made a boatload of money on EverQuest (and WoW) with a similar arbitrage "scam."

In older versions of EQ there was a Bazaar zone where you could see the price of all the goods around. For this scam I would find some item that is fairly rare for two reasons:

A) so most users don't know its true price, and B) because rare items would be more likely to have a particular price spread: A couple items for sale for around their true price, and a couple items for sale for far above that. I don't know why there were always people trying to sell items for 10 or 20 times the item's actual value, but it was common.

I would buy up all instances of the item at its normal, lower price, so now the market looked like the item was legitimately valued at this much larger price. Then I would loudly try to sell it for multiples of what I bought it for. People would see that I'm trying to sell for ~half of what the rest of the market is selling it for, so it must be a good deal!

edit: I don't believe this was illegal according to Sony or Blizzard, and besides, how would they prove I was doing this maliciously?

[cheald]

That's not really arbitrage as much as it is cornering the market (since you can ignore the outlandishly-priced items as a part of the viable market volume) and using a price pin to manipulate player psychology. I frequently did it with my own auctions - post 10x of something, then post 1x at +30% cost, so people see "a deal" and grab it. It reliably works in MMOs and in real-life retail - people are manipulable.

It's basically what JC Penny does when they jack prices up and give you coupons - by pinning the price high, but giving you a lower price (which is what they actually want to sell at) by issuing coupons, they manage to twist consumer psychology in their favor, and get people to think that they're getting a deal on what's actually a market-price item.

The reason that people posted inflated (high-volume) items in WoW, by the way, is that once upon a time, addons kept moving averages of item costs, then suggested purchase/sale prices to players. Posting a bunch of outliers could move the average upwards (since you couldn't see sales prices, just posted prices). The outlandish prices on low-volume items are because people are bad at economics and value their item far above the market's value. These are usually people with very little gold who got a lucky drop; they price the item so high because they believe that it "cost" them many, many hours of gameplay, and likely misgauge that cost.

MMO economies are a great example of Econ 101 in action.

[aqme28]

Good call about it not being arbitrage.

My theory on why there were always clusters of overvalued items is that people wouldn't know what to price items at all. They'd watch the item for a couple of days and drop it there, but before they had a clear idea they'd post it at a far higher price on the complete off-chance that someone would somehow buy it.

I eventually lost most of my EQ money by forgetting a 0 when I posted an item, so it all balanced out.

[cheald]

Well, people price things at the price they want to sell them for, not the price that people will buy them for. Many players fail to grasp the concept that an item's value is whatever someone will pay for it, and not a copper more.

[ttrreeww]

Works in the stock market too. Electricity prices, oil prices, etc.

[nandemo]

Er, it's a big stretch to say that sort of thing works in the stock market.

When people are going to buy a certain stock, they don't usually look at the whole order book and say "oh, the highest ask is 200, so this best ask at 100 is really good". They look primarily at recent prices and the best ask and bid, and secondarily at the top 5 or so bids and asks. If you put an order that's double of the last price, it will be far away from those top 5. And it's very unlikely that your order is going to be matched any time soon even if the stock moves up (some exchanges actually suspend trading of a symbol before its price can rise by 100% in one day).

Theoretically, it could work for illiquid stocks, but even then it's not trivial to do since 1) people will still look at historical prices, 2) it's risky, since it costs money to setup and you have no guarantee anyone will fall into your trap; because the stock is illiquid, it might cost you money to undo the setup 3) it's considered illegal market manipulation in some (most?) places, and you can easily get caught.

[lostlogin]

I believe both you and parent are correct. What about 1 off situations that remove the standard options for gauging value. The situations I have in mind are IPOs and one-off strange happenings. The particular instances I have in mind are the Facebook IPO and the situations where the markets wake up in the AM to a so-called new world. Situations such as when something big has happened. Companies hit by natural disaster, countries governments disintegrating or wars starting etc. These result in sudden big changes in company fortunes that are reflected in stock markets.

[ttrreeww]

Trading to other's tempo is not illegal. This is why everyone on Wall Street has the exact same trade....