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On Magic and Markets
Magic: the Gathering is a collectible card game created by Wizards of the Coast some 22 years ago. The nature of the game involves two or more players engaging in a battle of wits and strategy: picture chess but with players choosing from hundreds of different chessmen, each with different abilities. It involves aspects of resource management, strategy, bluffing, and cunning. The game is “collectible” in nature, in that the cards come in booster packs with varying rarities, with the more powerful cards tend to be rarer and thus more expensive.
MtG’s real-world economy resembles that every other commodity market. Supply and demand meet at the market-clearing price, and scarce commodities that are in demand tend to cost more. Sometimes, a great deal more. The people who run the company have done a good job of managing the supply side, keeping prices reasonable — i.e., within the reach of players of average means — even in the face of exploding demand. They carefully track the amount of product being sold, and release about four expansion sets (typically containing more than 150 new cards) each year, in multiple languages, worldwide.
There are multiple avenues by which players can engage in the game, and demand for cards generally comes in the form of people looking for single cards to use in their games, as well as those who are merely collectors or speculators. MtG’s most popular and most-played format is called “standard” which involves cards that were printed in the past two years (older cards rotate out and are only legal in older formats). Most of the cards that fuel the singles market for these formats ultimately find their way from draft tables to internet and brick-and-mortar retailers, but another source of cards comes from MtG’s online presence: Magic: the Gathering Online, or MtG Online
Wizards of the Coast’s stated goal for MtG Online is that it is meant to be an extension of the physical game, which MtG Online mimics to near perfection. Wizards also ties the online version to its paper counterpart by giving players the option of redeeming complete sets of cards in one’s online collection in exchange for a physical set of the same; those who take the option lose their online cards, but receive the physical set in the mail for $5.00. By this means, Wizards generates revenue, reduces the supply of cards available online, and introduces new copies of physical cards into circulation. It was a very satisfying system.
Then, a curious thing happened in 2013: Wizards decided that — with the release of the “Gatecrash” expansion set — the redemption fee would be raised to $25.00. What happened after that?
Predictably, the number of sets redeemed dropped precipitously. Additionally, there was a sharp increase in the price of some paper singles and a similar decrease in the secondary market price of online booster packs in the MtG Online economy. You see, the prize for winning MtG Online tournaments comes is online booster packs (though available for sale independently, most few people use the store for anything but purchasing tickets to play). This crash in the price of boosters has caused something of a crisis in the online economy: tournament participation has fallen and full sets can be bought and sold for record-low prices. The situation is sufficiently dire that program administrators recently announced serious changes to prize payouts and tournament entry fees. However, I think they’re dancing around the one thing that could arguably balm the whole fiasco and anybody with a basic understanding of economics can see exactly what is going on: the Laffer Curve in action.
Thanks to the 2013 price change, the supply of cards online increased without a similar increase in demand. Naturally, prices fell. Why? Because The “tax” for liberating a set of cards from MtG Online was quintupled, which moved the “Tax Rate” up the Laffer Curve into the realm of diminishing returns.
Regardless, the company might still have seen an increase in revenue, provided redemptions didn’t fall more than 80%. Unfortunately for them, the “spread” between the price of a complete online set and a complete real world set is considerably less than the redemption fee. This mismatch indicates that the online prices will have to continue to fall to the point where that mismatch disappears. That’s all fine and good until you consider that the price of a paper set of a new set of cards can run somewhere between $100 and $150; by the time you pay the “tax” to liberate your cards from the online system, you’re left in a position where you’re likely better off obtaining your cards from an online retailer of physical cards than from Wizards than in taking the trouble to get them online and then redeem them.
The falling price of cards in the online economy seriously disincentivizes players, which means that the problem will only compound itself. You might argue that this problem will only be resolved if the prices fall to a sufficient level that sets will again start being roast enough to drop the prices of redemption to reasonable levels – but at what cost? A denuded player base? A vibrant community pared down to only its extremes with the middle hollowed out?
Tax rates and incentives matter. I only hope that the MtG Online program administrators realize that before it’s too late.
Published in Culture, Economics
What was WotC’s reason for raising the redemption fee?
No satisfactory reason was ever given. Everybody knew however that WoTC was trying to pry more profit out of redemptions. They don’t share internal data however, so it’s hard to say how this policy affected their numbers.
I don’t think you mean the laffer curve which deals with maximizing tax revenue.
I think you are talking about elasticity, as the price goes up demand goes down, and transaction costs also impose a deadweight loss (taxes being a transaction cost).
What WotC is learning is that there is a high demand elasticity, thus an extremely large deadweight loss.
Or I could have my microeconomics all funky.
Oh, I specifically am referring to the effect of the Laffer Curve. It’s possible that WoTC raised the “tax” of liberating a set from MTGO right past the point of optimal revenue but are still getting more revenue than they were beforehand. It’s the ancillary effects that are now kicking in from the high tax rate which they’re now trying to fix.
The trouble is, the “solution” they’ve come up with is akin to amputating your hand if you get a wart.
There must be an additional datum. There’s more going on here or they wouldn’t do it.
Also, I can’t believe that many people were redeeming sets.
Why not raise the fee gradually? You don’t even need to know any economics to figure out that if jack the price up so much for such a trivial good that people will refuse to pay it just on principle.
But, then again WotC never struck me as the smartest guys ever, and of course MtG is evil crack in card form.
Just print your card off from online data bases and save yourself some money while playing with your friends. Proxy for the win!
Side note: I was excited about Market Festival until I realized that that two mana isn’t additional. It’s two mana total.
Yeah, that card sends you down to frown-town.
Mainly because the thing that drives singles prices is the competitive scene, and you need the real cards to play competitively.
This chart better illustrates what I’m talking about – As you can see, at far lefthand side of the horizontal axis you have zero redemption fee. The only barrier to people getting their cards from MODO at that point is obtaining them. They then merely have to order them from Wizards. But Wizards gets nothing for this. They only get the revenue from ticket/pack sales in the store then.
So, they experience steeply increasing revenues as the redemption fee increases… to a point. My point is that they have jumped over the optimal revenue point on the curve and in the process broken the online economy because they’re in the steeply declining portion of the curve – but they’ve received a bad signal because even though they’re getting more revenue, fewer sets are being redeemed which has secondary and tertiary effects which are now coming to light.
Ah so price elasticity and monopoly profits. Pretty cool example.
But that is not what it says on the card in italics.
My favorite Magic card.
In case it’s too small to read, it says:
Chuck Norris
Legendary Creature – Deity Actor
When this card comes into play, you win every game within a 10 mile radius
(This includes games that are not “Magic: The Gathering”)
Sorry, the image is not posting for some reason. There are a bunch of great pretend “Chuck Norris” cards.
Little know fact about MtG: It is an inexpensive yet highly effective means of birth control. Ditto Dungeons and Dragons.
I don’t know about inexpensive, but highly effective is true: I last took MtG ten years ago, and I’m still no closer to reproduction than I was then.
10th edition price, digital: $96.89 – Source: mtgotraders.com
10th edition price, physical: $224.29 – Source: starcitygames.com
So, if I’m understanding your point correctly, one could acquire an on-line set for $96 pay the $25 redemption fee and pocket the ~$100 delta. I’m actually surprised this hasn’t been arbitraged down to something closer to the fee.
What am I missing?
Also, do you see the introduction of the new client around the same time as being another causal factor in the recent decline? My anecdotal experience is that it’s had a major impact on the casual rooms.
One thing you’re missing (and I failed to explain) was that there is a cap on redemption times. Sets stop being redeemable 2 years after release, so there is also a gradual drop in the value of some digital sets after that date.
OK, that would explain older sets.
Still:
Khans of Tarkir, physical, $200 — digital: $80
I can’t find a single set at mtgotraders that’s valued more than its physical equivalent at SCG.
Again, I’m puzzled by this. Why would a merchant hold digital stock that can be converted to physical product of greater value?
The last part of the card reads, and I quote
“(In addition to the mana the land produces)”
So doesn’t that mean a single land can produce three mana? (two of any color)
Sorry FD, I meant to answer this earlier, but I dropped the ball.
The answer to your question is the difference between “cost” and “retail prices.” Starcitygames.com has 35 sets of KtK in stock right now. You have to fence the set you redeem.
So, if you look at their buylist price for full redemption sets you’ll discover that the digital price plus the redemption fee is barely less than the Ebay price.
I meant to comment on this more too. I don’t know about MODO, but I asked around.
The increase in the redemption has killed redemption, and as a result, wrecked the Magic economy.
Set redemption were necessary to burn off an excess supply of digital cards, because they removed them from the market. Without them, prices of individual cards have crashed because there’s an oversupply.
I think it didn’t just do immense damage to the online economy, but as a secondary effect it caused the prices of key singles in the paper market to jump as well.
What’s frustrating is that they’re doing anything they can to avoid having to lower that redemption price – even introducing “Itchy and Scratchy” money as alternate tournament entry and prize in order to attempt to boost pack prices and (presumably) cause the prices of full sets and cards to increase in the online economy.
I do expect to see the prices of RtR Dual lands increase around the time of the redemption cutoff date for the RtR block, which is in November. Shock Lands are a sure hit for Magic financiers and there is at least one desirable mythic in both Gatecrash and Dragon’s Maze, despite those sets being quite bad.
I kinda liked Gatecrash and DM.
Although, full disclosure, I enjoyed playing Maze’s End.