Death and Taxes

Two things you can't escape, even in a fantasy world. 

But more on death some other time. For now, let's talk markets and taxes. Guild Wars 2 is a month out of the gate and presents players with a trading system that represents a major shift from the traditional fantasy MMO. The Black Lion Trading Company allows you to shop or post items for sale from anywhere in the game at any time. This makes inventory issues somewhat less problematic for the roving player, who can simply open the interface at any time to get rid of excess baggage. The price of convenience is an astounding 15% (5% non-refundable posting fee + 10% after sale) tax on a player who makes a successful sale. This is a significantly higher tax compared to current competitors Rift and World of Warcraft. In those games, players pay a 5% deposit which is refunded if a sale is successful, and that deposit is based on the vendor valuation, which is usually much lower than the market price. Players only pay a 5%  tax on successful sales, and can pick up the proceeds from any mailbox in the game. GW2 players, on the other hand, can only pick up their proceeds at a Trading Post, which are scattered in the major cities around the world. Alternatively, they can find or buy (with real money or on the trading post) an item that creates a temporary trading post agent from whom they can collect items.

So what's with these high taxes? Taxes of any sort create what's called a "deadweight loss" in economics parlance. It's the value of goods and services that aren't produced but which consumers would buy but for the additional cost of the tax. Taxes faced by the producers of goods are called excise taxes. Usually excise taxes are charged on products  which endanger public safety or 'morality'. The sale of such products confers a private benefit on the producer and public cost on the rest of society. Thus, the government steps in to raise the price so that private agents experience the full cost of their purchases/sales. The deadweight loss that taxes create is usually justified on the grounds that that these so-called negative externalities exist.

Ok but what about games? It's not as if the players can 'pollute' the game, give other players lung cancer, or corrupt noobs with racy pictures of goblins. Yet what we see is an excise tax on everything in the game. What gives?

Well, I'd argue that there is a sort of external cost of looting, buying, and selling: MUDflation - that scourge of MMOs that trivializes the game and causes prices to skyrocket. MUDflation is the consequence of a coordination problem, the result of over-use of a common resource. MUDflation is a negative externality: a cost created but not felt by each player in proportion to the amount of items and currency they produce.

But this fact justifies taxes, in general. Why the difference beween different games? To get deeper into that, let's look at a simple mathematical model:

For simplicity suppose that you can post an item on the market for a price, Price, ranging from zero to one. Suppose also that the probability that you successfully sell the item is Pr = 1 - Price (i.e. the probability you sell is decreasing when price is increasing). Now let the merchant value of an item be denoted by M. M is the opportunity cost of selling the item to another player, i.e. it is the money you could have made selling the item to a merchant.

To continue, the WoW auction fee is dependent on the duration, too, so let the length of time you post, t, be a choice between 1 (12 hours) , 2 (24 hours), and  4 (48 hours). GW2 has no post duration limit or fee. In general, then, the expected value to a seller of an item is given by

E[V] = Pr(Sale)*Price*(1 - Tax on sale) - Pr(No sale)*Listing fee - Merchant Price

We now have what we need to compare expected values on WoW's auction house and GW2's trading post:

E[V] = Pr*Price*.95 - (1 - Pr)*M*(0.15t) - M 

= Price*.95 - .95*Price^2 - .15t*Price*M - M (since Pr = 1 - Price)


E[V] = (1-Price)*Price*.85 - Price*(.05)*Price - M

= .85*Price - .9*Price^2 - M (since Pr = 1 - Price)

Note that WoW has a more complicated dependence on the merchant value of an item and on the posting time.

To get the optimum price, take derivative with respect to price, set to zero, and solve. We get that the value-maximizing price for WoW  is Price = (.95 - .15t*M)/1.9. For GW2, the value is Price = .85/1.8.

Now, this is just a simple model, and its not a very general one. But we can use it to make a few interesting observations. First, it is easier to pick the right price in GW2 than in WoW. And in fact, the system of buy and sell orders in GW2 makes determining probability of sale even easier than the eBay style of WoW. Because its easier to find the right price, its more likely that people will sell their items on the trading post than to merchants in GW2 than in WoW, all other things equal.

Second, except for items with merchant prices that are very low relative to market prices, the market price that maximizes the sellers expected value is lower in WoW than in GW2. That means very high-priced items (relative to M) are cheaper in GW2 than in WoW, but items whose market price is closer to the merchant price will be more expensive in GW2 than in WoW. (You can reconstruct this part of the analysis by playing with the formulas in a spreadsheet.)

Third and finally, the expected value of a sale on the market is positive over a broader range of merchant prices in WoW than in GW2, and players in WoW always expect a larger return on sales. That means that on the basis of tax regimes, we expect the amount supplied by WoW players to the market to be strictly greater than the amount supplied in GW2, all other things equal.

In all, it looks like GW2 players face higher prices for buying on the  market and lower profits from sales. So why would this be a preferable tax system? I think its because of the post-anywhere, search-anywhere GW2 system. Rather than having to find a vendor and potentially sell valuable items just to make space in inventory, players can access the Trading Post and put their valuable items to good use. The lower cost of bringing items to market is justified by the higher cost of selling them.

Perhaps surprisingly, a Google search doesn't turn up much complaining about the tax system in GW2, though some players express surprise at the size of the tax. In fact, the tax is so big that it reminds me of England's 17.5% value-added tax, or VAT. There retailers prefer to post shelf-prices with the VAT figured in lest customers experience sticker shock at the register later on. Expect a similar policy in GW2's trading post to be implemented in the future.




Death and Taxes by Isaac Knowles, unless otherwise expressly stated, is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.

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