How Merchants Contribute Value

[stevieoopsie]

As you may know the merchanting (trading) industry has been rapidly growing in Pocket Legends. I've read through some posts lately and found that some people do not seem to understand much about the roles that merchants (traders) play in an economy (Yes pocket legends is an economy itself!) and question the value they bring to the community. Some who have expressed an interest in becoming an merchant are concerned that profiting by reselling items instead of working to produce more is unethical and therefore a profession to be despised by the community. Being a merchant (trader) myself in both Pocket Legends and real life (I have been working on the buy side of the investment industry for years), I thought it would be helpful to kind of provide an analysis of the industry's value from an economic perspective to defend its reputation. It is my firm belief that merchanting is not only an ethical profession, but also a productive one.

What is merchanting?

In essence, merchants buy items from sellers and resell them to buyers at a higher price, aiming to profit from the price difference. For example, if you purchase a custom hat from your neighbor for 100k and resell to your girlfriend for 200k, you've pocketed 100k in pure profits.


What does this mean for the economy as a whole?

To understand the value of merchanting as an industry to the overall economy, you must first know a critical economic concept brought up by Adam Smith in his book "Wealth of Nations", and that is the specialization of labor. Wal-mart, for example, is a perfect example of a merchant. It buys goods from it's suppliers - coke, P&G, Dell computers and so on. Wal-mart profits by buying these products at a low cost and reselling at a higher price by marking them up.

In pocket legends, the so-called merchants are the Wal-marts and Costcos of the game community. Many of you perhaps do not know, but most of the merchant buying occurs in the "black market", not the auction house. This is because items on the auction are actively traded and any time a good deal jumps up a clever merchant will pick it up immediately, leaving very little room for other merchants to react. This in finance is called market efficiency. For those of you who are interested, search up the "efficient market hypothesis" on Wikipedia. Anyhow, no markets are completely efficient but are all efficient to a certain degree.

The "black market" on the other hand, is not very efficient. This is because there is a significant barrier to entry in the auction house market - slots. Slots need to be purchased with platinum, and therefore most players do not have more than 1. In the "black market", you have a massive number of players who have items they need to sell but cannot do so via auction due to the barrier to entry. Relative to these sellers, there are relatively few people who will buy their items because most buyers go to the auction house for purchases, without any barrier to entry.

This means that there is a massive mismatch between supply and demand in the black market, which constitutes most of the economy. And the reason I brought up specialization of labor, is that most players without auction slots will specialize in farming, as they are not as capable as those with slots when it comes to DISTRIBUTING their products. Most of you know that this is true because you often see these sellers selling their items in the private market for much less the cs price- for them, it is simply not worth the time to try to market their items outside the auction and farming generates a much better return even means they have to sell their items at a lower price.

This is when merchants come into play. Most successful merchants have at least 30, 40 slots, hardcore ones like me own as many as 200-300. By having the slots, we can buy items from people without slots and resell them on auction at a profit. We SPECIALIZE in distribution. So you can see that for both the farmer and merchants, returns and profits are maximized or at least perceived to be maximized. Farmers can generate a higher return doing what they are good at - producing than trying to get a higher price for their products because distribution is something they are bot good at.

Producers (farmers) get 3 benefits when outsourcing the distribution to merchants:

Value of Time- does it generate better returns for farmers to farm? Or to try to sell their existing items in the private market at auction prices? Items in the auction already take an average 10 hours to sell, how long do you think it will take for farmers to sell their inventory at full market price when they can only access a much smaller buyer base? (a farmer yelling in Towne can access up to 24 buyers, an item placed in auction can be seen by hundreds of buyers at the same time). Selling their inventory to merchants and FOCUSING on farming is a much profitable way to go for these farmers.

Market risk- by outsourcing distribution to merchants, farmers can also transfer to them the risk that the items may not sell. This means that if they dont, merchants will lose money by paying commissions to put them back onto the auction again. The suppliers don't have to and have already sold their items to the merchant for cash.

More Opportunity Cost- being able to get immediate cash for their items means that farmers will not have too much money tied up in inventory. If you have a background in management accounting you know that it is always better to have cash rather than working capital. You get 0 returns on your working capital, but can get returns investing your cash.

On the economy as a whole

Consumers (buyers)- Since it is unprofitable for producers (farmers) to spend time distributing their items in the black market, they simply won't. This means a lot of the supply is not provided to the economy. Having merchants deliver the supply to the economy means higher supply, which translates into lower prices for consumers. I personally buy items from black market farmers at 30% -70% discounts to the auction and sells them on the auction at a 15%-40% discount to the lowest auction price. This translates into significant savings for buyers. With more supply circulating in the market, more demand is met and thus translating into higher utility for buyers as a group.

Merchants (intermediaries) - merchants make money off of the mark up in price. Do note that it is possible for merchants to lose money- sometimes when they mark up the prices too high items simply don't sell and drop in prices. Many merchants lose money because they do not demand a high enough margin for error when it comes to getting their supply for cheap enough. But overall as a group merchants do benefit.

Sellers (farmers) - farmers benefit by transferring the three things I mentioned above to intermediaries and focusing on what they do best - farming! Should merchants get paid for distributing items for farmers and transferring the risks? Absolutely.

Markets themselves- markets become more efficient over time because of merchants! This translates into higher liquidity, which makes it cheaper to trade and easier to unload positions and price stability, which you may not agree with but is largely happening on an overall level. Numerous economics papers have been published in the past 2 decades or so on the effects of financial intermediaries on financial markets, all of which lead to the conclusion that they produce higher liquidity, which makes trading less costly for participants and more price efficiency.

Conclusion: as I have described above, merchanting as an industry brings net benefits to ALL parties involved in the trading of items. This is not only a real life case but applies to all economies, even virtual ones like Pocket Legends. In fact, most economists who have studied intermediaries and their roles in the development of markets would tell you that merchants and traders alike (the real life example of which would be retailers like walmart and amazon, investment banks and securities exchanges, trading firms like Bunge and Cargill and much much more) have played an absolutely pivotal role in the growth of economies that they may have contributed more value to the economy than the producers and buyers (direct participants) themselves!