General Discussion
Here is what we know from the hard price limits set by blizzard

An item is maximally worth either 250 USD$ or 2,000,000,000 G
Gold is minimally set at 100,000 =.25c or 400,000 gold = 1USD$

---------------Gold is over valued--------------

A fair estimate for gold pickup and vendored item value a lvl 60 player can generate (produce) is ~400,000 gold per hour (production does not include ah sales because that is gold transfer and actually reduces the gold supply due to the imposed blizzard rake). This is also assuming a 'normal' gear set and clear rate, not some crazy gold find set with 20 billion damage.

At Blizzard's arbitrary exchange rate (100,000g=25 cents), this equates to $1/hour or 13.7% of what that same person would earn if they simply worked 1 hour at a minimum wage job.

Anyone with a Calculator should immediately realize that no Items should be listed on the AH for over 100 million gold (or should be purchased for more than 100 million gold) because that same item on the RMAH is only worth 250$ and is therefore less expensive both in terms of the time exchange rate ( 34.5 hrs at minimum wage vs. ~250hours of gross farming production) and in actual currency exchange.

Therefore in economic terms we would evaluate the gold market on the AH as being in a state of over valuing gold. Which may seem counter-intuitive because it is brought upon in part by the irrational psychology of people unwilling to exchange 100,000g for .25USD$- more on this later.

--------------INFLATION is the Solution----------------

I know this runs counter to nearly every post on the forums, but follow the logic and I think we will all agree.

1) The .25USD$ minimum fee on Gold / USD$ exchange is immutable.
----Because Gold is minimally set at 100,000 =.25c Either Blizzard arbitrarily picked a quarter as the minimum transfer rate or there are costs to Blizzard that makes allowing transfers of less than a quarter impractical. Discounting the first option as being unlikely we can safely assume the .25USD$ minimum fee is immutable.

2) 250$ is the Maximum Blizzard will allow in your account and therefore the maximum that can be charged for an item and is also immutable
--- If Blizzard were simply the greenback hungry corporate moneybags that many in this community assume them to be the 250$ maximum purchase price contradicts your claim. Therefore we can safely assume there is either a legal or liability rationale for the 250$ maximum (most likely regarding liability limitations for stolen credit cards, etc).

Because items have been bought and sold in excess of 100million gold, it would be quite difficult for blizzard to reduce the maximum gold limit on item sales, however I doubt anyone has purchased items in excess of 2 billion gold so lets fix the exchange rate to 250$ = 2 billion gold. Unfortunately, this would mean that .25c is worth 2,000,000 gold rather than 100,000.

There are two ways to address this: either allow trades of 100,000g to happen for .0125 USD$ (not possible) or allow trades of 2,000,000g for .25c this allows the gold Market to become linearly fungible with the USD$ (which makes exchange trend to equilibrium rather than the skewed cubic curve currently in place). What does this mean? lets say the exchange rate between the US and Mexico is set at 1$ = 10 pesos -therefore 100 pesos is 10$ and 1,000 pesos is 100$. We would say that those fungible at the exchange rate in a linear sense. This is the case for all real world currency exchanges if i was willing to pay 10$ for a product in America i should logically be equally willing to pay 100 pesos for that same product in Mexico.

In Diablo III the exchange is not fungible in a linear sense because people are not equally willing to pay .25cents for 100,000 gold as they are to pay 2.5$ per million gold, 25$ for 10 million gold and the big leap is 250$ should be worth 2 billion not 100million.

Unfortunately with 2,000,000 gold rather than 100,000 worth .25c instead of taking 15 minutes to farm .25USD$ worth of gold it would take 5 hours, wildly short of the time exchange rate currently in place. Currently it takes 7 hours and 15 minutes of farming at (400,000g/hr) to obtain 1 hours worth of labor at minimum wage (7.25$/hr) of gold based on the arbitrary exchange established by blizzard. to maintain that ratio in an economy where 2,000,000 gold is .25 USD$ you would have earn 8,000,000 gold per hour in gold drops and vendored goods.

Therefore I would recommend increasing the drop rate of gold to exactly 2000% of current value this can be done simply by adding 400% to gold drop per stack of NV. This would keep the purchasing power of the rate of gold earned per hour equivalent to where it is now. In a future post I plan on explaining how drop rates, Market efficiencies, gold drop rate manipulation, and gold sinks can be used to modulate the market price of gold in terms of USD$ assuming Blizzard changes the RMAH gold selling minimum to 2,000,000 gold = .25 USD$ .

Ultimately, gold is mostly hindered by its lack of liquidity. Zero gold trades happen on the RMAH because the arbitrary exchange rate strongly overvalues gold. As a result, nobody can easily obtain cash for their gold. Technically, a player could purchase items with gold and then resell them on the RMAH- but this multistep process introduces risk and inconvenience into the equation that must be added to the transaction costs, further lowering the TRUE value of gold.

Lastly, players willing to participate in the RMAH will always find better deals, even if the exchange rate issue were corrected and 'real' market forces were allowed to emerge. This is due to the fact that a significant number of potential buyers are arbitrarily removed from the pool due to their 'refusal' to participate in the RMAH. Currently, without a vibrant gold exchange, this shifts demand from the RMAH and sellers get a lower price for their goods than they otherwise would. This creates higher bidding wars on the gold AH, thereby overvaluing gold further, as people are purchasing items for more than the 'rational' market would dictate.

If a successful gold exchange were implemented, it wouldn't matter which AH the seller posted an item on (though, this is assuming instant transactions on the RMAH, which aren't always possible), but RMAH goods would still be cheaper relative to the amount of time it takes to obtain them compared to gold. This is due to the price premium on 'fun.' In other words, it's more fun to play Diablo 3 than it is to go to work, so gold will never trade for USD at the rate of what you could obtain in one hour of farming vs one hour of work. There will always be a multiplier on the farming exchange. Each player then determines whether or not the market price premium is worth it to them to participate in the RMAH. As outlined above, the current premium is roughly a multiple of 7, meaning the value of an item worth 7 hours of farming is equivalent to the value of an item worth 1 hour of minimum wage work. This multiplier becomes even larger as the wage increases ($14.50 an hour wage means 7 hours of farming is worth 30 minutes of work, a multiple of 14).

While I can't tell you what your own proper premium is... to me- if you're around even $10 an hour (which is far lower than most of you probably are in terms of wage), you're trading ~10 hours of pure farm time for 1 hour of work... I have no idea how you still prefer to farm, is your leisure time really worth that little? Keep in mind that your 'refusal' to participate in the RMAH doesn't actually mean anything. When you choose to sell an item for 100 million gold, say- it's no different than spending $250 on your credit card to buy 100 million gold.

Why? Opportunity costs. You chose to sell the item for 100 million, but you COULD'VE sold it for $250 and cashed that $250 out (we're assuming there's a real exchange rate here). Meaning the end result is: 100 million gold in d3 account, $250 potential gone from checking account. What if you had spent $250 to buy gold? That $250 potential is gone from your checking account, and 100 million gold in the account, same result.
This is a very well-written piece. My hat is off to you, sir/madam.

It is refreshing to see someone post a constructive and carefully-crafted analysis as opposed to the mindless, unformatted rantings we've grown accustomed to.
+1 my mind was blown
Will it lead to hyperinflation like in Zimbabwe?

Cause most of the gold sink mechanisms cannot keep up with the current rate of gold product already.

Anyone who has brought gold at $2.5 per million is going to be angry.

Anyone who has more than 10m is probably going to be angry to see his wealth shunk by 99%.

You see, the end result is you disposses the rich of their riches and make newbies "feel" richer by giving them more gold, but they end up with the same purchasing power anyway. The better solution would be to adjust the item drop rolls to a higher medium slowly over a period. How does that help improve the economy? It don't, because Diablo was never about economy, it was about finding loot which, as most people would agree, sucks.
The short answer is no- endless hyperinflation is not possible do to the hard value caps on items at 2billion gold and 250$ - The issue is the lack of linearly fungible currency exchange

lets say the exchange rate between the US and Mexico is 1$ = 10 pesos -therefore 100 pesos is 10$ and 1000 pesos is 100$... we would say that those currencies are linear and fungible as are essentially all currency exchanges if i was willing to pay 10$ for a product in America i should logically be equally willing to pay for that same product in Mexico for 100 pesos.

in D3 the exchange is not linear people are not equally willing to pay .25cents for 100,000 gold as they are to pay 2.5 per million 25 for 10 million and the big leap is 250$ should be worth 2 billion not 100million.

people rich and newbie (to use your terms) will feel better about the economy when a reasonable exchange between the RMAH and the AH is established. This will only happen when people are equally willing to consider the exchange rates in a linear fashion, and inflation is the easiest way to get to that position.
I made some edits for clarification
Wow this makes alot of sense and is well written. Well done +1 from me.
While you composing this post, bots has just generated billions of gold.
Been there , seen that.
The only answer is CHANGE the currency (Example = pounds).
you can always buy back old GOLD for Pounds at the same rate for the next 90 days.
It would be perfect to catch the boters and it will make disappear all the stored gold in the old
accounts. Decreasing the amount of gold in circulation.

Of course this economy will be doomed to repeat if the botters are allowed to roam free.
While it makes sense to buy something for $250 rather than a price tag over 100M, I fail to understand why it is not profitable to sell an item for over 100M. The seller can turn around and sell that gold. For example I could sell something for 200M, turn around and sell the gold to get a larger amount of dollars even after blizzard/paypal take their cut.
Is it just me or did anyone stop reading when he equated 250$ to 2 billion gold?

I sell things for 250$ all the time; there are plenty of items that demand it. However, I have never sold something for 2 billion gold. Like you said, the 250$ cap exists for liability purposes. It's completely wrong to correlate 250$ with 2 billion without any mention of supply or demand.

Your minimum wage estimate is also wrong:
34.5 hrs at minimum wage vs. ~250hours of gross farming production

You say that you can get 250$ in about 35 hours of work, but it takes 250 hours of farming to get this much gold. Wouldn't that mean that gold is worth MORE than the current exchange rate, if it takes longer to farm it than to work for it? If I'm working 250 hours to farm ~100m gold, then that gold should be worth what I would make in 250 hours of work.

If you like, we can discuss the finer points in-game. I just find your premise troubling in how misleading it is.

A real man's guide to the Real Man's Auction House:
The major issues are the exchange rate established by blizzard which uses fixed minimum and maximum price points that severely distorts the economy at the upper and lower bounds that can be fixed by setting the exchange to 2,000,000g /.25usd (and to keep the price premium the same inflation would have to skyrocket), second the price premium on goods is severely out of sync with the exchange rate players are willing to except. Most players would rather farm for 7 hours than spend 1 hours worth of real wages on an equivalent item.

we know this because gold is worth considerably less than 400,000 per 1$USD secondary markets offer rates of about around 1 million gold per 1$USD, and that number is going to increase.

One idea would be to reset the units of gold to 1 million which at current second market prices would sell for about 1$ and then slowly degrade with inflation to 25c where it would have to be readjusted to 2 million and so on over time to keep up with inflation. ( after 2 million you would have to increase the 2 billion price limit as well)

alternatively allow purchase of gold at value x in increments of .25c USD - you would expect to be purchasing 250,000 gold per .25c and to slowly increase over time, adjustments would not be necessary however you would only be able to purchase in 25c increments. This would not solve the exchange rate distortions, but would make bot farming for gold less profitable.
Anyone with a Calculator should immediately realize that no Items should be listed on the AH for over 100 million gold (or should be purchased for more than 100 million gold) because that same item on the RMAH is only worth 250$ and is therefore less expensive both in terms of the time exchange rate

WRONG - anyone with a calculator and half a brain will know not to list anything on the RMAH that will sell for more than ~120million gold or they lose money on the sale.

Think about it...
The second market is pricing gold at 1$ per million you would be selling your 250$ item discounted at 50% off --- thats the half a brain part paying a visit

The point is that the natural decay in the value of gold will fall precipitously toward 1$ per 8,000,000,000 gold or .25c/2,000,000,000g at which point no items on the auction house will be worth 250$

This will however create major problems for the unlucky farmer who without quality drops will take 8x longer to farm the gold required to buy the same item today- this is going to seriously diminish the "fun factor" for the average gamer considering the entire game per blizzards tacit admissions and implicit design is converting farming time to gold and gold to useful items.
Gold is not over valued.

The $250 cap is the problem, and it makes no sense.

10 years ago in d2 items were going for well over $1,000 USD.

It's prolly over legality concerns is my guess, but it makes it pretty stupid. Or its to force you to cash out expensive items in gold and then sell the profits forcing multiple taxes.

Whatever the case, you cant base gold value on the dumbass $250 cap.
No, currently 250$ = 220-250,000,000 gold or 250,000g/ .25 USD$

Which means Gold is substantially less valuable than 100,000 =.25 USD$ minimum price set on the RMAH (which is why this exchange needs to be fixed so that gold can be purchased and sold on the RMAH instead of bott controlled second markets).

It is trending toward 250$ = 2b which means it will take roughly 8 hours to farm the same purchasing power in gold that you can farm in 1 hour today. meaning the amount of gold dropped should be altered so that new players can farm and purchase gear.
Good post, +1.

It actually used (1) economics, (2) logic, and (3) common sense. Much better than that thread from the "PhD in economics" guy, whose post only had a little bit of common sense and no economics, and whose solutions are damaging at best.

Edit: Reminds me a lot of this post:

Of course, people hate looking at things from an economics perspective, but the sooner they realize the influence of the economy on this game, the sooner they will accept the things you are saying in the OP.
08/16/2012 03:57 PMPosted by chop2
The $250 cap is the problem, and it makes no sense.

Yes it does from a business point of view. If they allowed the cap to be $2,000 than they are risking a $2,000 loss when someone does a charge back or steals a credit card.

Capping it at $250 limits Blizzards risk on each trade.

You have an item that you feel will sell for more than $250, sell it on the AH and buy items that sell for less than $250 off the AH and list them on the RMAH.
all this does is limit the gold Ah to 250$ sales aswell.
As crazy as it sounds, some value some items more than 250$ (thats why stuff gets sold for more than 100mill) and those ppl would have to go through inconviences like multiple item trades to reach the value of an item. Ultimately a new currency would grow like it did in D2.

Im not sure what's your point or what issue you are trying to adress exactly.

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