In defense of merchanting

Merchanting is the activity of buying items at a low price and selling them higher later. If done properly, the merchanter can make substantial amounts of profit. Given factors such as the non-production of items in the process and an apparent increase in price volatility, this kind of business is often stigmatised.

However, merchanting may serve a useful role in the economy. Such activity can actually help to keep prices more stable and, as a bonus, the merchanter will be rewarded for it.

Elastic supply and demand
Price elasticity is how much the quantity of an item in the market changes with a given change in price. The more elastic the price, the more quantity will change with a given price change. There are two types of elasticity:

• Price elasticity of supply, which refers to the variability of the quantity supplied given a change in price. This is determined by how easily suppliers can increase or decrease production to respond to a price change.
• Price elasticity of demand, which refers to the variability of the quantity demanded given a change in price. This is determined by how easily consumers change their mind deciding which items to buy in response to a price change.

Much of market volatility happens where supply is relatively inelastic while demand is relatively elastic. In this case, consumers change their mind rather easily, while suppliers are constrained by how much they can react to that change in demand. Where demand increases, because there is not a proportionate increase in supply, price increases, while demand decreasing without a proportionate decrease in supply will decrease prices.

These conditions can be observed in markets such as that for:

• Raw materials (mats) produced on cooldown (Cd) e.g. Volatile Air in World of Warcraft. Considering this example, because of the Cd constraint, alchemists do not have the discretion to change production very easily. However, the buyers, perhaps enchanters, may need it in a moment's notice in time for a raid.
• Current bind-on-equip gear (BoEs) in World of Warcraft, especially at the start of a content patch. At this time, there would exist very few knowledgeable crafters (those who have read the plans/pattern) and very few of the specialist raw materials for it, yet so many raiding buyers, having to check back at the auction house (AH), who vie for the finished product.
• Rare items (rares) e.g. partyhats in RuneScape. Rares have fixed supply (they would be perfectly inelastic), while prospective buyers can still decide whether or not they want to buy.

Always in fashion
If there is no major fundamental change in the market, the aforementioned factors will be the source of short-term price volatility. However, looking over the long term, one can often see a general trend in the price, with the current price oscillating about it.

An avid merchanter can exploit this short-term volatility by buying while the price is below trend and selling while the price is above trend. In doing so, they make a profit. In addition, as merchanters do this over time, the volatility will decrease:

• In buying the item, the increase in scarcity will make prices rise. If the price is below trend, the price will tend back towards trend.
• In selling the item, the decrease in scarcity will make prices fall. If the price is above trend, the price will tend back towards trend.

Given that buyers and sellers like stable prices (as it helps with things like long-term budgeting), this merchanting activity will also benefit them.

How not to merch

Merchanting is fine where merchanters' actions bring prices back to trend. However, their actions can actually increase volatility when furthering a speculative bubble. In a bubble, speculators respond to a price increase by buying more of an item, hoping to that the trend will continue and they will profit on selling it later. As this causes the price to increase, a vicious cycle forms. It only takes a few speculators who want to sell for the bubble to burst and for prices to collapse.

By definition, as a bubble inflates, the price deviates from trend. When the bubble bursts, the price drops, often very quickly, back to trend. If the oversupply is too much, the price can actually drop further. Therefore, in participating in a speculative bubble, the merchanter worsens price stability.

Merchanting clans in RuneScape regularly blow bubbles. As their members accumulate stock, the price of the subject item tends to rise. When the signal is finally given to dump the stock, the market becomes flooded with supply and the price drops down very quickly.

Merchanters can help
It can be seen that, given the aforementioned conditions, the source of price volatility is not from merchanters but ordinary buyers and sellers. While participating in a bubble does not help, merchanters still can help stabilise prices in markets with inelastic supply but elastic demand.