It's not to difficult to identify the problem here. People enjoy getting loot for their character. People enjoy seeing loot drop. These trigger certain pleasure centers in our brains. People don't really enjoy searching the auction house for items. But the most efficient way to get gear for your character is not by seeing it drop.
Rational behavior will dictate that the path of least resistance (in this case, time) will direct behavior. So, because the Auction House is faster to obtain loot, this will be the default "best" place to get it. Especially since you can get what you want, right now. Even though it is less fun.
This means, that the Auction House needs to not be the cheapest best place to get all of your gear, which means that the game needs to - generally - have lower drop rates - because the existence of the Auction House increases the visibility and availability of gear. If everyone had good gear, and everyone could put it on the Auction House, then the prices would drop and the Auction House would be defacto the best place to get gear.
Unfortunately - the problem is that the Auction House pricing is already deflated. To the point of making the Blacksmith (another gear acquisition path) a non-option for someone attempting any semblance of rational behavior (Rational Behavior from an economics/Game Theory stand point - path of least resistance).
The huge problem with this is that the 'fix' from an economics perspective, would be to lower drop rates even further, so that prices rise, so that farming for items becomes more profitable. However, since people are getting less positive feedback from this game from a loot dropping perspective (and we've established [for most people] that the AH is less fun than seeing loot drop) lowering that even further would drop the positive feedback even MORE!
On top of this, the rarest of items (which can cause the largest spikes from a reward perspective) are not proportionally better that the most common items. So when you see a legendary item drop, the sheer volume of good blues and rares that have dropped have a majorly significant chance to be better than that rarest item drop. This creates a NEGATIVE feedback for what should be a highly positive feedback spike.
Since good blues are fairly common, and good rares and fairly rare, you eventually stop caring that you are getting good blue drop loot - from continuous reinforcement (see B.F. Skinner for more on this) - and the pleasure of gear acquisition in that respect no longer triggers an endorphin release. That coupled with the negative feedback from a legendary and rare drops, make people not get the same sense of happiness from this game as they did from D2.
Since this is supposed to be the fun part of the game (loot acquisition- as stated multiple times by Blues), that leads people with high levels of frustration to turn to an area of lower frustration to express the need to gear - the AH. Since the AH is not "fun" (unless you're interested in markets and the buying and selling of goods) then this also doesn't trigger reward mechanisms that would keep people playing the game.
Add to that the fact that is is frustratingly complicated to farm in the game (as specifically designed by Blizzard in order to reduce the effectiveness of Boss runs) due to the quest system being required to run in order to progress, it basically creates a system that discourages you from farming to gear up - hence why people just want to hit inferno running (they haven't gotten their loot fix yet and really need it to justify the game to their wallets). This then causes the brickwall to hit them as their gear level (and possibly skill level) isn't up to that level yet - and then the whining happens.
This is a MAJOR design flaw. The most fun thing in the game (getting loot), should be accomplished by most fun thing in the game to do (slaying monsters). This is Game Design 101 (I'm speaking as a designer myself). The best way to gear up needs to be by farming for gear (triggers 2 pleasure centers). Inferno difficulty is not a problem if:
1) is it possible to gear up in hell difficulty, and
2) you can get enough small upgrades in order to trigger the endorphin release frequently enough to make this behavior feel rewarding.
Since this was the design, but its not succeeding (at least by my perspective) - I'll add a couple of more concepts to this list - though they would not strictly be required for a successful system:
3) the process of farming gear is fun (fun would be created by dynamic content that is both optimal to complete and varied in its execution)
4) the process of farming gear is 'easy'. I don't mean easy as in accomplished easily, but rather as in its easy to get into a game where you can explore around and complete events and kill bosses in a way of your choosing. The content can be difficult - but the process of attempting the content should not be difficult.
But since number 2 on that list isn't currently happening, number 1 won't be perceived as possible by the players (10 clears, 0 upgrades, I will go complain on the forums that its impossible - even if its possible and I needed 100 clears. Since I've received no positive feedback from the game that my effort is being rewarded, I will feel as though my efforts are pointless.) This is the problem most people are facing. Take into account that waypoints are largely ineffective due to the questing system, and clicking through quest text on subsequent playthroughs is (for the most part) an annoying time sink, its not even 'easy' to go farm for loot that likely won't drop. And that random events have little or no reward, and random spawning packs of mobs (which are irrelevant to map variance) don't create enough of a varied exploring experience.
Now there's a 3rd item acquisition method, which I've touched up only slightly - which is the blacksmith. We'll ignore the cost and time associated with leveling him up at an in game level appropriate time for now. The cost of his combinations are too high. The lost opportunity cost of even just vendoring items (rather than salvaging them), and then paying the combine cost is much higher than the AH cost of items. This means its never worth it - even ignoring the cost of leveling the blacksmith - and even ignoring the random nature of his items. So his existence, from a player's perspective will typically never be rewarding - and it needs to be.
If you aren't interested in solutions, go ahead and stop reading here - I think I laid out the issues in a fairly straightforward manner. To be fair - I'm only discussing this part of the game (loot acquisition and character advancement), there are things that are great about this game, and other things that are also not so great I might comment on later. But to help fix the item economy - I recommend the following simple changes, and one more radical change.
1 - change) Change Legendary items to have a proportional quality level to their drop percentage. This means if a Legendary item drops once in 1000 magical drops (without modification), and a rare drops 1 in 100 magical drops, and a magic item drops once in 1 magic drop. Then Legendary items should be typically better than 999/1000 magic items, and 9/10 rares. Rares should likewise be better than 99/100 magic items. Right now, this is not the case (though you would likely need more statistically data than is possible from this end to prove that - but some simple AH searches seem to corroborate the data that this model is not being followed).
1 - expected effect) Legendary and rare items will now have a commiserate reward to their rarity, and thus carry a player through a longer period of time without a positive gear acquisition experience. In other words - a legendary item drop will be a large enough thrill , often enough, that it can keep a player going through a long dry spell.
2 - change) Increase the drop quality rate, or the effect of magic find to increase the number of rares (not as needed), and legendary items (needed).
2a - alternate change) Increase the general drop rate of magic items in general (quantity of drops, as opposed to quality)
2 - expected effect) an individual player will see more higher quality items which will increase his or her reward triggers. The goal would be to make it super likely (75%) to see a legendary drop in a full clear of a difficulty level for each player. In this way, legendaries would feel less impossible - but not be super common. This will make people want to farm more, and especially be willing to back farm (as number 1 will make them more valuable).
3 - change) Allow for a 'farm' mode of at least an act, if not a difficulty level to be available after you've cleared it at that difficulty. This would enable all waypoints, activate all events, but remove all quests from the act. You would be allowed to go anywhere and explore unrestricted - but still kill any bosses in the act, or complete events in the level.
3 - expected effect) it becomes less tedious and more interesting to back farm content for loot, emergent strategies for full speed clears would be interesting. This would allow for no change to the boss loot dropping strategy since boss runs would still not be the best way to do runs - but you could chain bosses in interesting ways for better loot.
4 - change) Allow for completed events, and resplendent chests, to add stacks of Nephalim Valor. You could do this in such a way that would be less than a champion clear (change Nehpalim valor to 15 stacks, have champions and uniques give 5 stacks, and an event clear or resplendent chest to give 2 stacks as a balancing example)
4 - expected change) This would give greater reward to actually exploring, and allow the existing aspects of the random maps to be more interesting to the players - rather than search for champions, then rush the boss. This varied play behavior will also prove to make back farming more enjoyable because of its variability.
5 - change) Huge surcharge on the gold AH. Like 50%. Add a cost to list an item equal to the vendor price of the item.
5 - expected change) This will cause prices to rise (because profits will be cut in half) and reduce the effectiveness of the AH from being the single best place to acquire loot upgrades. It is still a place to go, but since it becomes less effective as a place to sell - the prices go up, and the quantity of items goes down. This also creates a nice gold sink, and actively sends players to the more fun parts of the game to experience content. This would effectively double all reasonable pricing on the AH. As because there is a cost to list, the amount of redundant gear and content irrelevant gear will be reduced. It will also cause more salvaging (due to a lack of return on AH sales for subpar gear), which will indirectly make the blacksmith a more attractive option for gear upgrades.
6 - change) Add gems as a requirement or option to create gear from the blacksmith to force a main stat to be rolled on the item, and slightly reduce the cost of combines (say by the vendor price of the quality of gem in question)
6 - expected change) this will drastically improve the quality of items received from the blacksmith, and act as a gem sink in the game. But adding an emerald, as an example, to a recipe - it will force +dex on the item. This means the item created - while not necessarily optimal, will at least be usable in some form. This should be easily grokkable to the playerbase as the gems are already attuned each to one of the main stats.
These all would go a long way to helping the lack of positive game feedback in the loot system - shifting people towards playing for loot (as opposed to paying for loot) and legitimizing the blacksmith as a positive outlet for gear. While it won't make it any easier to get that "perfect item" that you are looking for - it will increase the amount of "good enough" items you want to see. I don't think that this strategy would drastically reduce the amount of maximum time spend to achieve a "completed" character.
One Radical idea I would try:
1 ) Create a new "NO AH" softcore mode, and increase drop rates in those games to compensate for that change.
1 - expected change) better for people who want to play Diablo as a single player experience and feel like buying equipment in the AH is "cheating" (regardless of whether or not you feel that way, how a player sees them self in the game and expresses themselves in the game is incredibly important). I creates a valid way to progress through the game for them that will be successful. Because the AH is technically required (as the game has been designed around its use, it is required), a mode to turn it off would help that player base feel more validated by the game.
Ok enough rambling.
Some replies to other people's posts in this thread:
On the concept of BoP
On the state of the Affix Pool
On my game design credits
On AH removal
An example of how #5 would look on a level 40 item (costing wise)
On AH having the best of the best equipment and its implementation
On how a level 60 level cap effects how you feel about farming