Meow Circulation: 192,312,185 Issue: 641 | 18th day of Eating, Y16
Home | Archives Articles | Editorial | Short Stories | Comics | New Series | Continued Series
 

Defining Investor's Inflation


by rider_galbatorix

--------

Hello one and all. Today, we're going to be talking about inflation. Wait- no, don't go away, I promise you this is something different.

I know what you're thinking. You're thinking: 'This author is going to go over the basic inflation is caused by supply and demand blah blah or just rephrase it." Trust me, that's not what I intend to do. I've been reading the Times long enough to know that there are a huge number of articles on supply and demand and the general topic of inflation. Articles on that topic are probably the second most common in the Neopian Times, with the gold trophy going to stories about the Pound of course. There are probably more stories about the Neopian Pound than there are neopoints in the economy, but that's straying beyond the purpose of this article.

Let's begin with a small story to set our example. Let's focus for the time being on one of the oddities of the Neopian Economy: there are lots of items which are rare, but don't have a large demand, and yet are sold for a large amount. Examples include pretty much all school supplies, plushies, trading cards, and toys. Though some of them are rare, making supply low, demand for them is also low since they don't give out avatars and they are only useful for collectors, and obviously not everyone collects them.

Let's say there is a new Usuki Doll released. Lawyerbot, being the huge fan that he is, wants one. But this new doll is rarity 97, meaning that it is very rare and doesn't restock often. But, one skilled restocker manages to snatch it up and puts a very high price on it. Now, Lawyerbot wants it, but he also doesn't want to spend too much for it (he's planning on taking a vacation to Neopia Central later on in the week to spend some time with his cousin, Accountantbot, who he hasn't seen in quite a while), and anyway, who wants to spend more to buy something anyway?

Anyway, Lawyerbot knows that Usukis aren't that popular for some strange reason with other people, so he decides to wait, thinking the restocker might get desperate. But someone buys it from the restocker, and he isn't an Usuki fan. He just thinks that he'll be able to sell it for more later on. And then another reseller comes along and buys it, and like that the doll changes hands several times, so that when Lawyerbot finally caves and buys it, he overpays by a huge amount for it. There goes his vacation, and probably the nice Christmas present Accountantbot was planning to give him.

This is a purely hypothetical scenario, but this is a lot more common than one might think. There are a lot of items in Neopia which essentially have no value even though their supply is low, because demand is so low since only collectors will pay the price. However, their prices go way up beyond what normal supply and demand theory would dictate, simply because other people buy them up, only to sell it to other resellers, who sell it to other resellers, and so on. This drives the price of the item way up, so the collectors ultimately have to overpay for the item.

This is true for a whole lot of things. We see here that the price has increased because of demand, but that demand isn't from the ultimate purchaser but from someone wanting simply to sell it to someone else. This is demand and drives up the price, but we can say it isn't real demand, rather artificial demand since the buyers are just buying to ultimately sell it again, and not to keep the product.

This leads to the price of the item inflating, though the only reason for that is of course, investors hoping to gain from selling it later on, and that's what really drives the prices up. I like to call this Reseller's Inflation, or Investor's Inflation, since investing is all that's driving the price up, not real demand per se.

An example of this would have been the Golden Sun Chalice. Selling for a measly 1,000 neopoints long ago, when TNT decided to activate it, the prices for the item fluctuated wildly, and it even went to above 10,000 neopoints at one point. Some people made millions from this deal before its price crashed back down again.

We can't really be sure what caused so many people to buy it with such eagerness, but we can guess they were hoping the price would go up, thus leading to a huge profit later on.

Perhaps another story is due, the one of the Mystery Island Aishas Stamp. The stamp was once a rarity 30 item that was sold for little more than 300 neopoints. Now, stamps have a special place as a collector's item for three reasons:

1. Stamps grant avatars, increasing the number of people who want them.

2. Stamps have an official high score list, meaning that they are one of Neopia's few official collectibles, those who have a high score list. Collectible Cards are also included in this category. That of course increases incentive for people to buy them, because collecting things like toys is fine, but they don't have an official system to keep them (like a Neodeck).

3. Stamps are consumable, or, they can't be taken out once put in. This of course leads to them costing a huge amount.

Now, the thing was that the Mystery Island Aishas Stamp was a ridiculously common stamp. At only 300 neopoints, almost anyone could get it. But then, one day TNT decided to retire a few items, and the stamp was one of them. Within a day, it went from only being 300 neopoints to going for over 100,000 neopoints on the Trading Post. Several of the other items retired like the Organic Tomato also inflated a lot, but the stamp was the most profound.

I think we need to pause and think why this happened. Supply and demand theory just can't explain away something like this. First of all, there were already a huge number of stamps in circulation, and so the supply side of the situation was pretty good. Sure, the stamp had been retired, but clearly there had already been a very large number in circulation already.

Demand also hadn't really increased. Just think about it for a minute. Not many Neopians collect stamps seriously, I know a lot of us keep a few in the album because there are so many stamps around and we might as well; an empty album doesn't look that good on a user lookup. But even then, everyone who would have ever wanted a Mystery Island Aishas Stamp would have had one in their Stamp Albums already.

So why the swift increase? The only reason that we can think up of is that once everyone realized that the stamp would be retired, they immediately decided that its price had to eventually increase. Sure, there were a huge amount in circulation, but everyone must have thought that eventually people would put the stamp into their Albums and the price would go up, so it was better to pounce on the opportunity. And once they noticed that the price had climbed up so much, they must have become even more eager to get a good deal. That's probably why other things like the Organic Tomato didn't increase quite as much, since people knew that foods, though consumable, are never in high demand unless they are Gourmet Foods.

To this day, the stamp still costs an exorbitant amount. That's rather odd, considering that few newbies would want to go and start collecting stamps seriously. If they wanted a few to get some in their album, they could do that with cheaper ones.

It's not as if the stamps have gone out of existence. No, I'd wager that there are still hundreds of thousands of that stamp out there, in various safety deposit boxes waiting for when they can be sold for a profit.

In addition to this, I could cite a more recent version: The Abandoned Water Tower Stamp. This stamp was released on the last day of the mysterious control panel event. That's right, everyone could get one for just a few clicks. One would normally expect that items like that would cost at most around 3,000 neopoints, but the price for this stamp kept fluctuating between 50,000 and 90,000 neopoints! Astounding! And some people managed to make quite a hefty profit restocking them (the author, sadly, was not one of them). As of now, the stamp is currently stuck at around 75,000 neopoints. Pretty impressive for a stamp that was given out to practically everyone who logged on. Once again, we see traces of the Mystery Island Aishas Stamp scenario playing right here too.

We have to remember that few Neopians do collect stamps, and as with the Mystery Island Aishas Stamp, pretty much anyone who really wanted the item for collection purposes could have simply used theirs which they got for free. And yet, the price reached astronomical heights on the very day that it was available for free! Only time can tell what will happen to the Abandoned Water Tower Stamp though.

This story is perhaps the pinnacle of Investor's Inflation in action. And as we can see, there are a few noteworthy points to this:

1. First of all, we have to note that the majority of sales of the items are going to resellers, not people who want the item for its value. Rather, they're buying just in hope of selling it at a higher price again. So, there is artificial demand for the item. I say artificial since the ultimate buyers are those who will eventually use the item, not investors who will trade it later on.

2. Now, we have to ask ourselves, since the price of the item is increasing because people believe it will increase, it behaves as a sort of self-fulfilling prophecy as more people buy it. We then have to wonder about the opposite scenario, what happens when people realize that the item isn't worth that much? Then, the price begins to slide and people begin to sell in a hurry, and the exact opposite now happens. An example would be when the Forgotten Shore started giving out Pirate Draik Eggs, decreasing prices a very large amount. In this case, investors want to sell as quickly as possible to avoid a loss.

3. Even though it appears that items have decreased in supply, they really haven't, though it is almost as good as that. Take the stamp for example, there are probably still thousands in safety deposit boxes, but until people decide to withdraw and sell them, they might as well not even be there. This affects supply by limiting the number of items up for sale.

4. Another noteworthy thing is that the prices of the items do go up, but when they do, they become hard-to-sell, or HTS. For those unfamiliar with this terminology, HTS items, as opposed to easy-to-sell items or ETS, often stay in trades or shops for long periods of time before they are sold. Anyone who's tried to sell any expensive food will know how long it can take to find a buyer, and many lose patience and sell the HTS items for far less than they are worth in the end. Items like the Abandoned Water Tower Stamp mentioned above are ETS in the beginning since so many people want to buy them in order to resell them later. So okay, you've all gone ahead and driven the price of the stamp up. But what then? What happens when the price does finally go up high? It turns out that these very stamps that once would have been gone within seconds are suddenly very hard to sell. They sit around trades for a long time, and those who own them usually end up settling for less. Why? Obviously because, after time, the hype for buying them as an investment is gone, so the only ones who will shell out the high prices would be the ones who really want them, or collectors. And like I've mentioned, most collectors already have these items since they were given out in droves. Even if there are a few sales, they might be from people who have hopped on the reselling train a bit late, and not from the people who really want them. I think there's a lesson here: however the value of an item is driven up artificially, eventually, the laws of supply and demand take over and it crashes back to its true worth.

5. We can also see a sort of natural reflex reaction of many Neopians to invest in these items. I think because we've been trained to do so by so many articles and all, and in general it is a good idea to invest in these, but driving the price so high up thanks to that is going to be futile.

So, at the end, I guess you might ask what the point of all this is. Quite simply, it was to explain a phenomena that the simple supply and demand story doesn't capture.

Another thing, it also captures the fact about how investors drive the economy.

Almost everyone invests in items because it is considered an amazing way of making neopoints, and when a huge number see an item that they think at once is going to go up, that's when something like what happened to the Mystery Island Aishas Stamp happens. I for one have several books and plot prizes I plan to sell when they go up in price as well.

So, just so you know, if you're looking up something, just be aware that maybe it shouldn't be as high as it is. And also know that not all sales are final; there are a lot of deals where investors simply sell to other investors, making the price go up.

As a side note, Lawyerbot got angry for us using his name as an example. A lawsuit would have followed, but we struck a deal. We can't say exactly what it was, just that involved Usukis. Lots of Usukis.

 
Search the Neopian Times




Great stories!


---------

Bread and Butter
The cake is a lie.

by _epiphany_

---------

The Ixi Raiders of Cogham Village
"I have pillaged trading caravans," he muttered for the eighth time. "I have attacked innocent adventurers. Why am I the only Ixi Raider who cannot raid Cogham village?"

by pillsi

---------

She Wanted Ice Cream!
How could I refuse her?

by maeruu

---------

The Quest to Rescue Baelia: Part Two
The road was a dangerous one for the pair of adventurers as they set out from Terror Mountain.

by leonieke



Submit your stories, articles, and comics using the new submission form.