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Anatal Klep
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Posted - 2008.12.13 17:48:00 -
[1]
Apparently a large number of EVE players slept through Economics 101 because there are a lot of ships and equipment being sold at prices below marginal cost. In talking to players who do this, the problem seems to lie primarily in incorrect costing of the materials used to build these items, particularly T1 items.
Some players seem to believe that if they mine the minerals themselves, they are free. That is just not true. The cost of the minerals is the amortization of their ships and equipment plus the opportunity cost of their time (e.g., what they could have made, say, running L4 kill missions with the same game minutes they used to mine).
Other players believe that if they purchased the minerals cheaply in another region or at an earlier time, that gives them a cost edge in manfacturing. That is also incorrect because EVE's manufacturing infrastructure and other simulation issues are not the same as in the real world. There are several reasons why EVE's simulation only approximates the real world, but the important one here is that real world manufacturers are not indifferent to selling their inventory or building something. They have fixed costs in plant, equipment, and labor that exist whether they actually build something or not. In addition, modern accounting practices are largely driven by tax that is irrelevant in EVE. Thus real world manufacturers only sell off their materials inventory instead of building something during bankruptcy.
But in EVE the manufacturer is essentially indifferent to selling their mineral inventory in the market or building something. In addition, each build is effectively an independent decision. So an EVE manufacturer always has an easy alternative opportunity for making profit.
So in EVE the best way to determine the cost of materials used to manufacture goods is the current market prices of the materials in the region where the goods will be sold. Those current market prices represent the marginal cost of materials (within the limits of EVE's market imperfections). It has to be in that region because EVE's markets lack perfect information since one cannot access prices in other regions instantaneously.
As it happens, valuing materials this way has advantages from a gameplay perspective. One does not have to deal with tedious and error-prone computation of the actual cost of mining, which is constantly changing as the player advances through the skill levels and upgrades ships and equipment. The market prices also provide an objective criterion. Most important of all, though, the market prices are convenient, easily found, and allow one to separate mining, market trading, and manufacturing easily.
An example follows in Part II
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Anatal Klep
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Posted - 2008.12.13 17:49:00 -
[2]
cont'd from Part I
To see this consider a simple example. Suppose the bundle of minerals to build a BS currently costs exactly 100m in the region where the BS will be sold. Now suppose we mined or bought exactly that bundle of minerals at a cost of 90m. Also suppose the total of manufacturing and BP costs was 2m while the cost of the sell order is 1m.
Case 1: we build an sell a BS for 105m. That transaction nets us 105 - 90 - 2 - 1 = 12m in overall profit.
Case 2: we sell the minerals directly without building a BS. That transaction nets us 100 - 90 - 1 = 9m in profit.
Case 3: we build and sell the BS for 95m. That transaction nets us 95 - 90 - 2 - 1 = 2m in profit.
From these examples it is clear that so long as the price we can get for the BS is greater than 100 + 2 = 102m, we are better off building the ship. (Note that the 1m sell order cost is a wash in all cases.) But at any price less than that we are better off simply selling the minerals in the market.
So when we sell the BS for 95m we still make money overall but we are essentially using our 9m in mineral profits to offset a ship building loss of 102 - 95 = 7m.
In the real world competitive market operation assumes that participants will act with what economists call "enlightened self-interest". IOW, the assumption is that the participants will always maximize profits. When they don't the markets are imperfect.
Because EVE is an economic simulation, EVE's markets are not perfect in an economic sense for a variety of reasons. However, when players fail to exhibit enlightened self-interest that can aggravate the existing imperfactions in EVE's markets. IOW, dumping ships and equipment below marginal cost can cause serious problems for everyone, besides just reducing profits for the dumper. (Dumping by the robber barons of the 19th century caused such economic and social havoc that by the early 20th century every industrialized nation had laws making such dumping a criminal offense.)
In EVE those problems are manifested in role playing. EVE is an RPG where Manufacturer is one of the primary roles to play. It is fundamental to an RPG simulation that any player should be able to properly pursue a role in the game and that they can master it by acquiring skills, cleverness, and hard work. IOW, no player should be able to prevent another player from pursuing a role. The game system might allow them to be hindered (e.g., piracy) or even killed in the short-term. But it should still be viable for them to make a long-term career of the role (e.g., in EVE, when killed one's clone allows one to continue in the role).
However, repeated dumping can prevent players, especially new players with limited skills and bankroll, from playing a Manufacturer role. Being able to sell your goods and make a profit at it are critical to the nature of the role. If dumpers force one to simply sell minerals rather than building things to make a profit, then one if playing a quite different role: Trader.
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Syn Exec
Synergy Evolved
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Posted - 2008.12.13 17:58:00 -
[3]
The concept of opportunity cost is so foreign to so many so called "producers"
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KISOGOKU
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Posted - 2008.12.13 18:37:00 -
[4]
Can you explain case 2? is 90m buy price ? Use mineral sell prices it is what your real profit for manufacturing BS  .Difference mineral sell price -mineral buy price is not procution profit , trade profit actually
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Anatal Klep
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Posted - 2008.12.13 18:43:00 -
[5]
 Originally by: KISOGOKU
Can you explain case 2? is 90m buy price ? Use mineral sell prices it is what your real profit for manufacturing BS .Difference mineral sell price -mineral buy price is not procution profit , trade profit actually
That is pretty much my point. One needs to separate trade profits from manufacturing profits. In EVE a manufacturer ALWAYS has a choice of manufacturing or simply selling the materials invetory. enlightened self-interest dictates that they sholuld make the right coice (i.e., maximize profits).
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Treelox
Amarr
Market Jihadist Revolutionary Party
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Posted - 2008.12.13 20:06:00 -
[6]
but..but....but...but my minerals are free!!!
--
Chribba's LoveQuest 17:00hrs Dec. 20th (Prizes!!)
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Anatal Klep
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Posted - 2008.12.13 20:24:00 -
[7]
Originally by: Treelox
but..but....but...but my minerals are free!!!
How fortunate for you! Now when you build things and give them away for free you can get a tax write-off from CCP.
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cosmoray
Cosmoray Construction
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Posted - 2008.12.13 21:42:00 -
[8]
It is cheaper if I mine my own minerals. I price Tritanium at 2.5 ISK when I mine it, so there is a bigger profit on ship sales.
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PuRuSkA
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Posted - 2008.12.13 22:07:00 -
[9]
ok
been doing this, manufacturing and at first i was only selling mineral while mining and trying to figure out what was profitable to make
so yeah some market item may seem to be really edge on profit to null profit
but you might miss a few point when you look at bpo/bpc
#1 the waste (10% on orriginal blueprint from market)
#2 your production efficiency level (need level 5 for 0% waste on that part) and that show in the info of the bpo/bpc you look
#3 reseller like those who try to get isk back from a ship to get another ship who don't bother sell it under other people cost
#4 those who don't do their math correctly like this guy say his trit value 2.5 when he can sell it 3.4 easyly
#5 forgotten station where you can sell 10% higher than elsewhere and still sell it !
so after applying those 5 point you will do profit manufacturing t1 ship
if a ship sell your perfect manufacturing cost buy it and resell it higher
if it's value is under the mineral cost, buy it and resell it at profit or simply reprocess it to make other things and save on your mineral ! :)
to whoever say the mineral are free because they mine it you just losing great isk opportunity
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Valeronx
Gallente
Celestial Horizon Corp.
Celestial Industrial Alliance
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Posted - 2008.12.13 22:36:00 -
[10]
Originally by: cosmoray
It is cheaper if I mine my own minerals. I price Tritanium at 2.5 ISK when I mine it, so there is a bigger profit on ship sales.
No Cosmoray, no ! You can't do stuff the way you want to do it. You must do stuff the way others tell you to do it, otherwise all the long-winded crap they post telling you why you should do it the way they want you to do it won't work ! 
.
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Mari Katarin
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Posted - 2008.12.13 23:15:00 -
[11]
Now that I know how much cosmo values his minerals at, I can undercut him by valuing my trit at 2.49!
If only there was some way to search for discussions on this very topic stretching back to the dawn of time. Then we wouldn't have to rehash offering insights as to why sometimes it's easier to transport a battleship instead of tens of M minerals and how it's easier to babysit one sell order instead of 6. Not to mention the clever tidbit about "if you see an item below mineral cost, buy it, reprice it or reprocess and sell."
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Anatal Klep
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Posted - 2008.12.13 23:24:00 -
[12]
Originally by: cosmoray
It is cheaper if I mine my own minerals. I price Tritanium at 2.5 ISK when I mine it, so there is a bigger profit on ship sales.
Please look at the examples again. Trade profits for minerals and manufacturing profits for ship building ate two different things.
If you sell the ship at less than {fair market mineral value plus manufacturing costs}, you will make less money than if you sold the minerals at fair market value and did not build the ship. IOW, your mineral profits are compensating for manufacturing losses.
If you sell the ship for more than that breakeven, you will make the mineral trade profit plus a manufucturing profit.
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Anatal Klep
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Posted - 2008.12.13 23:39:00 -
[13]
Originally by: PuRuSkA
ok
but you might miss a few point when you look at bpo/bpc
#1 the waste (10% on orriginal blueprint from market)
#2 your production efficiency level (need level 5 for 0% waste on that part) and that show in the info of the bpo/bpc you look
#3 reseller like those who try to get isk back from a ship to get another ship who don't bother sell it under other people cost
#4 those who don't do their math correctly like this guy say his trit value 2.5 when he can sell it 3.4 easyly
#5 forgotten station where you can sell 10% higher than elsewhere and still sell it !
In my examples the 2m "manufacturing cost" assumed that one had properly amortized the BP cost properly, including research, and included the actual maunfucaturing costs at the station/POS. I was only concerned with valuing materials cost in the post.
Quote:
so after applying those 5 point you will do profit manufacturing t1 ship
if a ship sell your perfect manufacturing cost buy it and resell it higher
if it's value is under the mineral cost, buy it and resell it at profit or simply reprocess it to make other things and save on your mineral ! :)
Unfortunately buying the ship and scrapping it to sell the minerals is usually not viable because of the 10% loss in reprocessing. Buying the ship and reselling it is viable. That is common when pilots upgrade and price their old ships to sell fast. But it doesn't work if the dumper builds ships faster than the rate they are sold to buyers who need ships. You can get stuck with an inventory you can get rid of.
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Olga Mokroff
Caldari
School of Applied Knowledge
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Posted - 2008.12.13 23:40:00 -
[14]
Originally by: Anatal Klep
Originally by: cosmoray
It is cheaper if I mine my own minerals. I price Tritanium at 2.5 ISK when I mine it, so there is a bigger profit on ship sales.
Please look at the examples again.
cosmoray is trolling.
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YunFu Yan
Yan Enterprises
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Posted - 2008.12.13 23:40:00 -
[15]
Originally by: Anatal Klep
Originally by: cosmoray
It is cheaper if I mine my own minerals. I price Tritanium at 2.5 ISK when I mine it, so there is a bigger profit on ship sales.
Please look at the examples again. Trade profits for minerals and manufacturing profits for ship building ate two different things.
If you sell the ship at less than {fair market mineral value plus manufacturing costs}, you will make less money than if you sold the minerals at fair market value and did not build the ship. IOW, your mineral profits are compensating for manufacturing losses.
If you sell the ship for more than that breakeven, you will make the mineral trade profit plus a manufucturing profit.
He was kidding.
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Yan Enterprises - We mean business. |
Tasko Pal
Heron Corporation
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Posted - 2008.12.13 23:48:00 -
[16]
Originally by: Anatal Klep
Originally by: Treelox
but..but....but...but my minerals are free!!!
How fortunate for you! Now when you build things and give them away for free you can get a tax write-off from CCP.
But I do get a tax write-off. Sell ship for 100 mil -> pay 1 mil in tax. Give away that ship -> pay 0 mil in tax. I save 1 mil in taxes!
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Talsha Talamar
Amarr
Nebula Rasa Holdings
Nebula Rasa
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Posted - 2008.12.13 23:50:00 -
[17]
Edited by: Talsha Talamar on 13/12/2008 23:53:32
Originally by: cosmoray
It is cheaper if I mine my own minerals. I price Tritanium at 2.5 ISK when I mine it, so there is a bigger profit on ship sales.
Priceless :)
I also will take 1 billion units of your mined trit @ 2.75...,
so that you make an instant profit,
deliver to jita please :)
P.S.: I could also offer a trade, paying in advanced moon materials valued way blow the market ;)
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Kazzac Elentria
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Posted - 2008.12.14 01:00:00 -
[18]
Cosmo wins my maple syrup award of the week |
Kimi Nogura
Caldari
Tech 2 Holdings Limited
Tech Holdings Limited
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Posted - 2008.12.14 02:22:00 -
[19]
As with all things in the Eve marketplace people need to know all the facts before they can make a true judgment on the "cost" of a product for one of there competitors. There are so many variables such as:
ME of the producing BPO/BPC
Low Cost Mineral Sources of the builder via in-corp/alliance buying
Station vs. Array building cost.
Reprocessing of Below market value traded items for minerals
Supplementation of offering stocks via low end buyorders.
Long Term market domination attempts via price wars to drive out competitors.
All those plus 100s more will determine the "true cost" of doing business of player x
Especially with domination attempts you will find a lot of sellers looking at the long game results of what they are doing and not just looking for the quick isk turnover.
TBH that is part of the fun of the economic game is developing strategies that confuse your opponents but accomplish your goals. :)
And of course who can leave out the ingame rich git who is just lowering a price below cost just to mess with you. 
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Tiirae
The New Era
HUZZAH FEDERATION
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Posted - 2008.12.14 03:04:00 -
[20]
When I first started building rigs I was fairly brutal with my costing, and just intuitively used sell orders as the cost of the raw materials regardless of what I actually paid for them.
That's all fine but I soon reached volume where this was pointless. There's no way I could sell the volume of raw materials I have at those prices, in the same time that I could build rigs and sell *those* instead. Rig producers do not buy from sell orders, only people building rigs in tiny quantities for personal use will pay those prices.
So there are situations where opportunity cost really isn't. Once I buy those raw materials the only realistic option I have is to build rigs with them. Just have to choose the right ones, and for that purpose it doesn't matter how I value my raw materials.
Just a slightly different viewpoint in a specialised case.
The same would apply to large quantities of mission loot. Lets say you acquired a few hundred 425mm railguns of various types through regional buy orders. Most of those are not going to sell very quickly, so even though in theory you could get X for them, in reality it is more profitable to reprocess them and use the minerals to build something that *is* going to sell quickly.
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Anatal Klep
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Posted - 2008.12.14 05:06:00 -
[21]
Originally by: YunFu Yan
He was kidding. [:lol:
Perhaps. But one of the reasons I did the post was because I was tired of explaining it to people who really did believe that sort of thing -- like 5 or so a dumpers a week.
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Mari Katarin
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Posted - 2008.12.14 05:10:00 -
[22]
And the last thing not mentioned yet -- your competition may have entered the market long ago, when margins were non-zero. Like, for example, the orca market right now. In a few months you may look at a 1-5% margin on the Orca and write a post exactly like this one. But the producers of those bad boys have already paid for their BPOs, and a 1% margin beats nothing at all. When the alternative is an idle asset you make the best of what you got.
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Kazzac Elentria
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Posted - 2008.12.14 05:12:00 -
[23]
Originally by: Mari Katarin
And the last thing not mentioned yet -- your competition may have entered the market long ago, when margins were non-zero. Like, for example, the orca market right now. In a few months you may look at a 1-5% margin on the Orca and write a post exactly like this one. But the producers of those bad boys have already paid for their BPOs, and a 1% margin beats nothing at all. When the alternative is an idle asset you make the best of what you got.
Whats amusing is that for a period of about a day when Orca prices hit their bottom end, you could actually buy them, reprocesses them and resell the components into something else.
...not that I would ever do such a thing |
Artimis Scout
Caldari
Wormhole Cartography
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Posted - 2008.12.14 05:14:00 -
[24]
Originally by: Anatal Klep
Apparently a large number of EVE players slept through Economics 101 because there are a lot of ships and equipment being sold at prices below marginal cost.
Please don't wake them up, this how I am making money at the moment.
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Mimi Ar'Skele
Minmatar
Republic University
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Posted - 2008.12.14 05:16:00 -
[25]
Originally by: Anatal Klep
Originally by: YunFu Yan
He was kidding. [:lol:
Perhaps. But one of the reasons I did the post was because I was tired of explaining it to people who really did believe that sort of thing -- like 5 or so a dumpers a week.
Ok, I'm calling BS. Tell me where people are selling significantly below sell order mineral cost in any volume. If it's more than one guy selling a frigate every couple of days I'll happily fund an account containing a character with perfect refining anywhere in empire. That'll cure your problem, and make me richer all in one step.
The reason I don't believe you is there are plenty of people on this board making a good living from reprocessing t1 goods. You will rarely see goods going for below sell order mineral pricing.
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Anatal Klep
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Posted - 2008.12.14 05:23:00 -
[26]
Originally by: Tiirae
When I first started building rigs I was fairly brutal with my costing, and just intuitively used sell orders as the cost of the raw materials regardless of what I actually paid for them.
That's all fine but I soon reached volume where this was pointless. There's no way I could sell the volume of raw materials I have at those prices, in the same time that I could build rigs and sell *those* instead. Rig producers do not buy from sell orders, only people building rigs in tiny quantities for personal use will pay those prices.
Yes, I've had that problem myself. The salvaged materials market is highly volatile and because it is so thin it is very subject to price manipulation by individual players with deep pockets. However, the rig prices are a lot more stable so one can price based on the long-term average material costs.
Quote:
The same would apply to large quantities of mission loot. Lets say you acquired a few hundred 425mm railguns of various types through regional buy orders. Most of those are not going to sell very quickly, so even though in theory you could get X for them, in reality it is more profitable to reprocess them and use the minerals to build something that *is* going to sell quickly.
Right. Rat loot is another special case since most of the stuff is useless for sale. It is either stuff no one wants or it is in such oversupply that all it is good for is balloon ballast. So I just reprocess all of it (except a few obvious money makers) and treat it like mined ore that I refined. The market then provides the marginal cost for the minerals when I use them.
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Mari Katarin
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Posted - 2008.12.14 05:57:00 -
[27]
Originally by: Anatal Klep
[
Right. Rat loot is another special case since most of the stuff is useless for sale.
And yet another special case: hauler drops. Even a lazy non-looting ratter will stop and pick up 20 million units of trit and 10 million pye when they blow up a hauler spawn near a station. Then what? Typically there's a lack of one high end or another to insure & self-destruct battleships on location. Those low ends accumulate until the units read 'B', get hauled to empire as capital torpedoes, turned into battleships and "dumped" on the market.
In your eyes it's a loss of a million or two to sell "below cost." In the ratter's eyes saving an hour of babysitting .01 isk sell orders is 30M isk in bounties. Not to mention the potential faction drops.
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Cheopis
Amarr
One Stop Mining Shop
One Stop Research
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Posted - 2008.12.14 06:09:00 -
[28]
Some below market value activity is second-stage activity, meaning that a buyer with a very low offer price on something collects a lot of it over time, then turns around and sells it at a much higher price, making a lot of isk. They might not need to charge mineral value to do so, however.
I frequently encounter these people myself. When someone sells me 774,289 defender I's (a good current example) it's possible that they manufactured them, but it's also possible that they have been collecting them for two months at a buy order much lower than where mine is now sitting. They make instant profit and can immediately turn that isk into a new project, and I get minerals below cost.
Win-win.
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Anatal Klep
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Posted - 2008.12.14 17:36:00 -
[29]
Originally by: Mimi Ar'Skele
Ok, I'm calling BS. Tell me where people are selling significantly below sell order mineral cost in any volume. If it's more than one guy selling a frigate every couple of days I'll happily fund an account containing a character with perfect refining anywhere in empire. That'll cure your problem, and make me richer all in one step.
Currently in Everyshore all DSes, CR, INs, are selling below marginal cost and I got out of that market months ago to sell only BCs, barges, and BSes. Now prices are collapsing for those as well. As we speak lowest prices for Covetor, Cyclone, Ferox, Raven, and Scorpion are well below marginal cost. And Everyshore generally has higher ship prices than Jita and lower prices for hisec minerals -- which says a lot for Jita's prices. In fact, one dumper I talked to wasn't dumping at all; he was a legimate trader. He bought 20 Domini in Jita, hauled them to Everyshore, and sold at the lowest price, which was higher than Jita but below marginal cost.
Quote:
The reason I don't believe you is there are plenty of people on this board making a good living from reprocessing t1 goods. You will rarely see goods going for below sell order mineral pricing.
Yes, but they do so with lowball region-wide buy orders that snap up the most egregious underprices. Most dumping is done at or slightly above the fair market mineral value. That's because the dumper is using mineral prices that are only a few % under fair market value and has to add in manufacturing costs and profit. So reprocessing is, at best, marginally profitable when you buy dumper's ships in the market at competitive prices.
However, that is beside the point. If you buy the dumper's ship and reprocess or resell it, that does not deter him from dumping more. He is still making a profit; it is just not as much as he could have made. The real problem with dumping is that it prevents people from playing the Manufacture role properly, especially new players who don't have deep pockets.
If the dumper dumps high volume, it is very risky to buy the ships for resale and reprocessing may not be profitable. Then other sellers try to compete by pricing close to the dumper's price. That forces the market down overall and makes it very tough for new players w/o maxed skills and standings.
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Anatal Klep
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Posted - 2008.12.14 17:52:00 -
[30]
Originally by: Mari Katarin
And yet another special case: hauler drops. Even a lazy non-looting ratter will stop and pick up 20 million units of trit and 10 million pye when they blow up a hauler spawn near a station. Then what? Typically there's a lack of one high end or another to insure & self-destruct battleships on location. Those low ends accumulate until the units read 'B', get hauled to empire as capital torpedoes, turned into battleships and "dumped" on the market.
In your eyes it's a loss of a million or two to sell "below cost." In the ratter's eyes saving an hour of babysitting .01 isk sell orders is 30M isk in bounties. Not to mention the potential faction drops.
Not necessarily. You just have to be careful about how cost is defined. Assuming you build something from the materials, there are two possibilites for valuing the cost of those materials. You can grind out a true cost by amortizing your ship and equipment, adjust for the opportunity cost of your time, depreciate tiem in inventory, etc. That's tedious and error prone.
The easier way is to simply look at the current market value of the materials. That market value already averages in all the various sources of materials and defines what the marginal cost supply is. If you price whatever you build to make a profit based on that cost, then you will always maximize your overall profit. Your profit will be the difference between the market value of materials and the price you sell the product at plus the difference between your real materias cost and the current marginal cost market price (ignoring your manufacturing costs). You may not know exactly how much total profit you made because you don't know your true acquisition costs, but you can be certain that you maximized it.
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