Insights in the Neopian economy

[SillySilenia]

I noticed a fair amount of interest in posts in which I give some insight in the Neopian economy (or that of closed/autarkic virtual economies in general) elsewhere on TDNforums, and thus decided to open a thread to share more of such insight without having to worry about derailing the scope of a thread.

Disclaimer:

These insights are my own. While they are backed by both observation and some knowledge of economy, I am not an economist. I will attempt to explain why I believe something to be or not be the case and back it with facts or economical theory as much as possible, but if any point I make needs clarification, please feel free to ask for it and do keep in mind that I certainly can be wrong.
General statements I make are exactly that: general. There will always be exceptions. There is no such thing as a wholly save investment. There can always be unexpected circumstances which throw the market for a loop.

The Neopian economy is a complex mixture of various different aspects that play a role in determining the price, supply and demand of an item. Items do not exist in a void and even an item that might otherwise have been a picture-perfect demonstration of a particular principle can react differently due to influence of one or more of such aspects.

Even though the Neopian economy is both closed and virtual, real life circumstances can and will impact it. Neopets itself also does not exist in a void. This may result in the occasional discrepancy between the "logical" result of certain patterns and aspects and the actual result. While some of these circumstances are predictable (real-life holidays), others are not (server issues, real life catastrophes).

Posts I make may be broad or narrow in scope. If you're uncertain if a principle I've mentioned in a post applies to a certain type of item, feel free to ask. With exceptions of the shortlist of items below, please do not ask about specific items or "types" of item when that category exists of ten or less items, as even though small, there is a sincere risk that public discussion of the economical merits, risks and prospects of a specific item may impact or influence it.

Specific items I feel save to mention, discuss, etc.:

• Items that the market is more-than-saturated with and as result do not sell even at 1NP (e.g. Dung) due to having essentially no demand and a ridiculous supply.
• Any item with an essentially fixed price due to eternally being available in, for example, the Hidden Tower. (Baby Paint Brush)
• Any item that cannot be traded in any way, shape, or form between accounts. (Starter Paint Brushes)
• Any item so rare and/or expensive that even if my post caused all TDN members to attempt to start buying or selling it would make no impact because it's unlikely that more than maybe five of them have either the item or the funds to buy it. (Certain stamps, for example)
• Certain items that will be perpetually popular and have both reasonably large supply and large demand (Codestones, Red Codestones, Dubloons, some Neggs)

INDEX BY SUBJECT:

Italic links are links to posts I've made somewhere else on TDN Forums or later on in this thread.
Non-italic bold links are links to pieces posted off-site (unless otherwise mentioned, this will be Google Docs)

List of terms and definitions/explanations:

• Definition list, general. NEW! (Jan 11th) Eternally a work-in-progress.

Autarkic/Closed Virtual Economies

• The many factors and complications of a closed virtual economy. (Dec 4th, 2014)
• General patterns of closed virtual economies and how this results in what appears to be a mixture of capitalism and communism. (Dec 5th, 2014)

Events and Seasons

• Influence of Charity Corner event on future prices for Plushies and Toys. (Jan 5th)

Recordkeeping and calculations:

• On costs of goods vs. costs of inventory when calculating profit/loss. NEW! (Jan 11th)

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Feel free to ask me any questions either about pieces I have written and listed above, or about the Neopian economy in general. You're also welcome to request me to write about a specific subject, though I cannot promise I will do so.

CURRENTLY WORKING ON: "On the influence of real life holidays and seasons on seasonal and non-seasonal items".
Going to be a long one if I'm going by my Notes of Clarification in regards to terms used in said article.

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Disclaimer in regards to sharing of any documents hosted on Google Docs:
Of any above-linked documents hosted on Google Docs, sharing outside TDNForums is permitted solely if the content remains attributed to me (“SillySilenia of TDNForums”);
AND the document is not replicated, changed or adapted without prior written permission, which includes but is not limited to hosting the document anywhere else and/or removing this note;
AND you do not require compensation in any form for the sharing of such a document.
Other commercial use is also NOT PERMITTED with sole exception of the indirect, virtual, commercial benefit that having a better understanding of the Neopian economy (or virtual economies in general) may bring you.

[Delshnya]

In one of your posts, your say that the state (TNT) decide wich items are released, and in wich amount. What roll does The Wishing Well play there? I not sure how the Well works, it is suppose to be random, is it not?, so TNT doesn't entirely control that, they choose a rank of rarity and minimum donation. Or does the Wishing Well choose depending on the item? Because I read somewhere that it is random, but when I look the last winners, usually there are a lot of Bag of Peanuts and Goodie Bags... I won 3 times, the first was Bag of Peanuts, the second a stamp, and the third I think it was a book. This is not exactly relevant to your post I suppose, and It could seem kind of stupid matter, but I'm curious about it.

[SillySilenia]

In one of your posts, your say that the state (TNT) decide wich items are released, and in wich amount. What roll does The Wishing Well play there? I not sure how the Well works, it is suppose to be random, is it not?, so TNT doesn't entirely control that, they choose a rank of rarity and minimum donation. Or does the Wishing Well choose depending on the item? Because I read somewhere that it is random, but when I look the last winners, usually there are a lot of Bag of Peanuts and Goodie Bags... I won 3 times, the first was Bag of Peanuts, the second a stamp, and the third I think it was a book. This is not exactly relevant to your post I suppose, and It could seem kind of stupid matter, but I'm curious about it.

When it comes to the amount in which an item is released, it is not-so-much a matter of exact numbers, but rather of frequency and availability. While you are correct that it could be said that the Wishing Well is a partial exception to that, it is nonetheless still "property" of TNT and coded by TNT.

As a result, while they may not control it down to the exact number which item gets entered into the economy, they do control what is made available.

In this, it works somewhat similar to the main shops. TNT does not control which items are bought, but they do control which items are available to buy. And that is, in the end, what matters.

 

As to the "which amount", that is more of a matter of rarity in general (and then I don't necessarily mean the numbers TNT slaps on the various items, even if those have implications for those items that can stock in the main stores). They decide to, for example, more often have certain stamps stock than others, to have certain omelettes given out more frequently by the Giant Omelette than others. It's proportion, rarity, frequency. On the great, great majority of items, any one- or two-digit number accounts for such a small portion of the total amount of such items around that it may as well not count.

[Anime]

The Wishing Well has a rarity cap (speculated to be 89, but we can't be entirely certain), so there is a sever limit on what can be obtained from it. I can't really think of anything below that rarity that would have a significant impact if a handful more were released, and while there are things that ARE of worth that can be obtained from it, they still have enough that the total max of 20/day entering the system would have a negligible effect, as Silenia explained at the end of their post.

 

Additionally, of the 30 granted wishes I currently see on the page, only two of them will not vanish upon use (Royalgirl Korbat Plushie and Fyoras Lidschatten {which I believe is Fyoras Eyeshadow in German}). The rest are 4 Bag of Peanuts (likely for the avatar, so they'll be used quickly), two different Stamps, and then 22 Goodie Bags of varying types. So in the end what we're getting with this is an utterly tiny decrease in demand for items that have a solid, constant demand. The people who won chose their wishes, of course, and they were then selected at random, but in the end the economic effect is less significant than your average shop.

[Bloods_Mistress]

This post is briliant. I definitely want to follow along. Academic discussion over this topic is very interesting. I have noticed that many people began to complain about arbitrary inflation of mediocre items, but isnt this the same thing that happens in the real world? A celebrity wears a certain pair of tennis shoes that no one cared about 10 minutes before, and suddenly their price jumps tremendously? Do you feel that this helps regulate the economy well, and keeps the items in a circular flow, or do you feel this is detrimental to the economy and causes too much variation in pricing?

Is this even a good question? lol

[Delshnya]

The Wishing Well has a rarity cap (speculated to be 89, but we can't be entirely certain), so there is a sever limit on what can be obtained from it. I can't really think of anything below that rarity that would have a significant impact if a handful more were released, and while there are things that ARE of worth that can be obtained from it, they still have enough that the total max of 20/day entering the system would have a negligible effect, as Silenia explained at the end of their post.

 

Additionally, of the 30 granted wishes I currently see on the page, only two of them will not vanish upon use (Royalgirl Korbat Plushie and Fyoras Lidschatten {which I believe is Fyoras Eyeshadow in German}). The rest are 4 Bag of Peanuts (likely for the avatar, so they'll be used quickly), two different Stamps, and then 22 Goodie Bags of varying types. So in the end what we're getting with this is an utterly tiny decrease in demand for items that have a solid, constant demand. The people who won chose their wishes, of course, and they were then selected at random, but in the end the economic effect is less significant than your average shop.

 

My point of view was more about how much involvement have TNT over the Wishing Well. If it is random, or depend on what people wish for. Because if it is random (taking into account the minimum donation and the rarity), TNT loses some control there.

[SillySilenia]

 

My point of view was more about how much involvement have TNT over the Wishing Well. If it is random, or depend on what people wish for. Because if it is random (taking into account the minimum donation and the rarity), TNT loses some control there.

That is something we cannot know from this side of the equation. It looks unlikely to me that TNT hand-picks the wishes, but at the same time, by means of the limitations on the Wishing Well, the lack of control is less significant than when it comes to the mainshops (where they have control over which items stock but not which items get sold). Let me restate it this way: TNT has full control over the availability of items and/or over the windows of opportunity they offer, even if not over the exact number of each item.

 

This does, however, not actually take away from their control, since they alone decide if the Wishing Well stays up, they decide if any particular item (in the meaning of, all copies of one specific item. Copies in the meaning of "objects featuring the exact same specifications and lacking any difference", not "item that has been copied") is to be retired or otherwise lifted up or down in rarity ranking (and thus possibly become unavailable through main shops and Wishing Well) or even removed from the site altogether.

 

When I say they have control over how many of an item get released, I mean in that they set the ranges, not that they specify down to the exact number how many.

 

Bloods_Mistress:

"I have noticed that many people began to complain about arbitrary inflation of mediocre items, but isnt this the same thing that happens in the real world? A celebrity wears a certain pair of tennis shoes that no one cared about 10 minutes before, and suddenly their price jumps tremendously? Do you feel that this helps regulate the economy well, and keeps the items in a circular flow, or do you feel this is detrimental to the economy and causes too much variation in pricing?

Is this even a good question? lol"

 

For this, we'd have to dive into the difference between:

• normal inflation (for the sake of this answer, defined as "inflation staying roughly in line with the general inflation impacting the economy as a whole and/or other items of its like" as well as "inflation as result of decreased supply/increased demand with actual cause");
• arbitrary inflation (something happens that causes a sudden increase in demand or decrease in supply that does not match up with either the patterns that could be expected for that item or the line of the economy as a whole, without substantial reason or cause; that is, any such reason or cause is based on matters other than the merits (and to a lesser degree, supply) of an item either on its own or in comparison to its competitors);
• artificial inflation--which can be split up in what I personally call:
  • true artificial inflation (someone purposefully creates an increase in scarcity; and/or someone purposefully creates or causes an increase in demand by other means than the merits of the item itself or an improvement to those, both with the express purpose of driving the price of said item up for their personal profit) and
  • false artificial inflation (someone purposefully creates the illusion of an increase in scarcity or demand with the express purpose of the driving the price of said item up for their personal profit).

Note that each of these has a definition given tailored to this specific response and are stated more black-and-white than they generally are. For example, artificial inflation can be a mixture of true and false--some decrease in supply but not nearly what is alluded to--there are some "proper" causes of increased demand other than item's merits/improvement to them (such as decreased quality/merits of an item's direct competitors), arbitrary inflation can have multiple causes of which some are "proper", some of which are not, some of which are artificial. However, I intend to go into the depths of this subject later, as there is more than enough to be said about this to fill an article (or three).

 

To get back to the question itself:

 

Both normal inflation and (many forms of) arbitrary inflation are simply a to be expected part of an economy and whether this is good or bad depends in part on which side of the equation you're on and in part on what is the exact cause of the inflation.

 

Another part of importance would be the results it has beyond the specific item itself, which may be either positive (people spending money they can afford to spend in other items related to the specific item), more-or-less neutral (due to buying the specific item, they now do not have the money to spend on things they would have otherwise bought) or negative (people spend money they cannot miss, end up in debt and as a result buy less objects/spend less money on objects than they otherwise would have). It's a whole lot more complicated than that, but those are some examples of negative/positive results. (If due to being in debt after buying said object, someone goes and hunt for a job, which they otherwise would not have done, and ends up--after paying off their debt--with more money free-to-spend than they otherwise would have had, it tends towards positive in the long run)

 

"Normal" (but nonetheless extremely high) inflation caused by a crash of a currency's value, rather than normal changes in it, tends to not exactly be a good thing for the involved economy/ies. -cough-

 

Arbitrary inflation as a result of a celebrity being seen with a Kindle may be bad for people looking to buy a Kindle for the original price but, provided that the rising price is a result of more demand rather than a pre-emptive price-raising, means that more people now have bought a Kindle and there thus are larger amounts of people interested in buying e-Books. Which is good for that section of the market/economy, but may or may not negatively impact the print-book section. (Not quite necessarily, though, as a celebrity being seen with a Kindle may get people who normally rarely read into reading, and as a result they might buy print-books as well. On the other hand, avid readers are not likely to base their decision on buying/not buying a device that allows reading e-Books on a celebrity being seen with it).

 

However, arbitrary inflation is rarely long-lasting and thus tends to make for very bad long-term investments and extremely risky but potentially highly-profitable short-term investments (potentially also highly unprofitable, however--depending on whether you manage to sell the items before the inevitable crash). Speculation on an item in a state of arbitrary inflation is a potential starting point of both true and false artificial inflation.

 

A significant difference with artificial inflation is that the majority of the increased demand is the result of people buying the item for itself (or rather, for its emotional value), because they want to possess said item (even if not on that item's merits). As a result, the majority of people will not buy large amounts of them and when the item's value inevitably ends up in a downward spiral, they still have what they paid for--the item. Even if its value has decreased, and likely one or more of the reasons they bought it no longer apply.

 

Note that not all cases of items being bought for their emotional rather than physical value are arbitrary inflation, or rather, are not arbitrary inflation in the forms seen on Neopets. The near-inevitability of a crash in value is predominantly the case with the sudden artificial inflation I described above.

The value of art is almost purely based on emotional value and could, depending on perspective, be considered to be seen as constantly in a state of arbitrary inflation and has been so for a very long time (with some brief exceptions).

 

Artificial inflation tends towards negative results more often than not for almost everyone involved except the original perpetrator(s) and thus for the economy as a whole. This is mostly because in the long run, a false increase of demand or scarcity (whether actually created or merely claimed to exist) will not hold. That much is the same with arbitrary inflation.

 

A significant difference, however, is that they do not buy the item for the sake of the item; rather, they're attempting to buy profit. As a result, people are more likely to buy large amounts of any such item. Thus, when the bubble bursts, they do not have what they paid for--profit.