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Comments on Saturday 4 May 2013:
Real-world economics in action! Goozex, a video game trading service that's now pretty much defunct, ran like this: a game has a value in 'points'. You can offer a game for its point value, or you can request a game for its point value. When there is both an offer and a request, the two are matched up, the points change hands, and the requester is also charged a "token", which costs a dollar. The seller pays for the shipping to the buyer, and ships the game. Also you can buy points.

For a while this model worked pretty well, games traded regularly, people were happy with it. Gradually, the request queues got longer, and there were no dangling offers to be found. And in talking about this, and what could cause it to have collapsed like that, I think I found the answer. And it's kind of interesting.

Imagine on a small scale, let's say there are 6 people. One of them buys 5000 points and 5 tokens. Each game costs 1000 points. The other 5 people all have a game they want to trade, so they sell their games to the first person. Now they each have 1000 points and the first person has no points and 5 games. Now in the system is 5000 points worth of demand, and zero supply. The guy who bought the games finishes them, decides to keep one, and sell the others. Now there's 5000 points worth of demand, and 4000 points of supply. The other users buy tokens so they can spend their points, and one of them buys a thousand points too. That one buys two of the games, two of the others buy a game, and two are left with their 1000 points and are in a queue. Now the original user has 4000 points, two users have 1000 points each, and there's no supply again.

This sort of trading can go on indefinitely, the point is, the demand never ever goes down - there will always be 6000 points worth of demand, or more if someone buys some points again. Supply can go up if people buy games for money and sell them for points, down when people make their trades, or stay the same when people make trades and then want to resell the game back in again. But anyone who has points won't want to buy games for money and sell them for points - they want to use their points to get their game, obviously, because cash is good for other things but points aren't. Demand can only ever go up, short of people dying with a points balance and no request queue. So it's inevitable, with this design, that the Goozex economy would fail. The prices were fixed, at first, but now they freed them up which has resulted in massive inflation as the prices go up to try to compensate for more demand than supply, but since there is essentially infinite demand, inflation can't fix it - all it does is make people mistrustful of the system so they try to cash out, making the problem even worse.

The funny thing is they could have solved this problem at the beginning, if they'd thought it through and realized this would happen - rather than charging a dollar for a trade token, they could have just charged a percentage of the points involved in a trade. That way the demand and supply would both 'soften' when a trade happens, preventing their current situation where there is literally no supply and nobody wants to provide any supply - it doesn't matter how many points you can get for your game if there's nothing you can spend points on.

On the other hand, maybe with a points-only system a different problem would arise - people would try to trade in games for more points than they could buy for the same amount of cash, and would refuse to pay cash for points because they would perceive that they could get a better deal. However, this problem would resolve itself - an oversupply of cheap games would reduce their point price (before trades are made since not enough people are buying those games for points) until that game's point value corresponds to the cash value of buying that many points. So in the end there would be no advantage to trading for points rather than buying them, unless you were trading games people actually want, in which case the system is working as intended!

There might be a problem persuading people that buying points is ever a good idea though, when they could just buy the game they want in the first place for the same amount of money. Tokens are a clever way of sidestepping that psychological issue. Alternatively, if the point value (including the transaction 'tax') is always slightly lower than the cash value of the game, then it would make sense to buy points if you don't have any, while still making sense to trade games in. [05:05]
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