Regarding why people feel the AH is a design mistake - the drop rates, that is, the standardized Diablo 3 drop rates (overall) are based on an auction house trading system instead of the trade/barter system in Diablo 2. As such, just finding loot that is an upgrade for you is a real problem for people, and I'm talking even leveling up. The entire drop rate mechanism is designed to drive you into the AH at some point, which will vary depending on the player's tenacity/patience.
The problem here is not one of loot quality, but sufficient quantity, especially during leveling up, to find upgrades that actually feel like (and are) upgrades. Nephalem Valor is a royally misguided crutch, and only works for players at max level, which is the exact opposite of the way it needs to work (assuming we maintain D3's abysmal loot distribution scenario as is). In Diablo 2, rares were relatively...rare, and uniques, while rare were still found a whole freaking lot more than in Diablo 3.
During my level up process on my first Monk, I didn't find a single legendary until LV 53 in Hell. And of the few rares that did drop (remember, no NV until LV 60), only a single one was even an upgrade at the time.
There is also the problem of item relevancy even during leveling up. That is, most rares and legendaries are still ten levels past their relevancy at the location in the game where they drop. This is a big problem. Because of this, unless you buy the (also misguided) "Reduces Level Requirement by XX" items from the AH or farm them on a max level character of your own, you ultimately feel weaker as you level rather than stronger. That's one of the biggest letdowns in the entire game. Items that drop two full acts past where they're needed and useful for are utter garbage. This major problem is the main factor driving people to the AH system, because natural progression during leveling up happens so rarely that it just feels awful, and the sad part is that this is how the game was intentionally designed.
The loot quality doesn't need to be increased, and in reality the iLV 63+ enhanced jewelery and new Archon rare level set pieces for crafting in the next patch should have been tied to either questlines or new sub-areas within each act for players to farm. With that in mind, when I say the loot quality doesn't need to be increased, that is the overall available max loot quality. What does need to be changed is when many of these affixes roll. Can you complete Hell with a 200 DPS weapon? Sure. Are you going to have enjoyed your playing time while doing so? Almost assuredly not. I should know - I didn't have the gold on my Wizard, who was my first LV 60, to buy things from the AH the first go-around so I had to gear up naturally. Suffice it to say I did not enjoy elite packs taking damn near as long as a full-on World of Warcraft raid boss to down with such pitiful equipment.
To add to the above mix of grossly unworthy loot for when you get it, the RNG is stacked against you to roll certain affixes more often than others to the point where getting a halfway viable item on your own just takes way, way too long. Even farming using a midrange paragon level character, getting gear for my alts has been....well, let's just say at this point I'm just running certain areas in certain difficulties for certain items in the hopes that I can find something that sells for a lot of gold (or money) and then use those funds to get my alt their gear before continuing to level up.
The reality in D3 isn't that the items in and of themselves suck, it's where the items drop (relevancy during leveling) and remarkably rare occurence of even a halfway decent roll that combine to make the drops suck, in addition to the OP's points outlined above. I can virtually guarantee if we had more low/mid level legendaries and set items (sets especially) with diverse characteristics and Diablo 2's drop rates for all items in general, much of the item suck complaints would vanish overnight. I shouldn't be halfway through Hell before I see my first Legendary, and in my case specifically, four months into the game before I even saw my first set item. Yes, I didn't get my first set item until September last year. All in all I've seen three set items so far, and I can actually name them right off the top of my head: Blackthorne's Medal [Legacy], Tal Rasha's Allegience, and Shen'Long's Relentless Assault [No Socket]. Pretty pathetic, no?
I suspect that the problem with the item relevancy during leveling has to do with the fact that the item drop areas were really designed around the old Diablo 2 Normal, Nightmare, and Hell sequence, but Diablo 3 also has Inferno, meaning that the item "squish" was made much worse and thus what would have been relatively OK placement of item drops in a three tiered difficulty design becomes an abysmal range in a four tier difficulty design structure. The plain truth is that Inferno should have been Hard Mode+, available once meeting certain extra criteria after defeating Hell, not the way it is all strung together now.
It's going to take a massive rewrite of item affix range rolls, drop locations, and addition of items to really fix Diablo 3's loot problems. I hope the developers realize this instead of continuing the WoW raid tier type increases we're starting to see happen on a regular basis.
Official Mac Tech Support Forum Cookie™ (Mint Chocolate Chip)
Guaranteed tasty; Potentially volatile when dipped in General Forums Syrup®
Caution: This cookie bites back.
Edited by TheTias#1192 on 1/27/2013 11:34 PM PST