Neopian Economics, Making your Fortune

First, there are several Neopian Markets we can focus on, and we will look at them each individually as each exhibits different principles for selling items. These are: The Shop Wizard, The Trading Post and the Auction House. In this series we will also explore why some items are so expensive, the background behind cheap items and why the rich Neopians keep getting richer. In this article we will first look at the basic economic problem, classification of resources and the Neopian Market Structure. Understanding the basics will ensure understanding at deeper levels.

The Economic Problem

The main Neopian economic problem is classified by scarcity and choice. Scarcity occurs when Neopian consumers desire more of the particular item than is currently available. Whilst this isn’t a problem for low rarity goods and freebies, shop purchased goods and competition prizes fall into this category. The problem of choice also occurs. Neopians have unlimited wants for items, meaning once one item is brought, then almost instantly the urge and desire for another, perhaps better item becomes apparent. Unlimited wants and finite resources lead to inflation, where price becomes the mechanism in which resources are allocated. If an individual purchases one item, then he or she is doing so at the cost of potentially buying another item. This is called opportunity cost, which is the cost of the next best alternative.

Free Goods

It is clear that opportunity cost only arises when consumption involves foregoing an alternative. However, consumption of some goods involves no sacrifice and consequently has no opportunity cost. These goods are not created from scare resources and are available in such abundance relative to demand that it is possible for one Neopian to complete satiety, that is, until no more are required, without depriving someone else of consumption. These goods are labelled free goods. Free goods in Neopia take the form of items that can be obtained without neopoint payment. For example: The Giant Omelette, The Soup Kitchen and prizes from Coltzan's Shine. Whilst some of these items are indeed re-sellable, the initial cost in receiving the items is effectively nil, making them free goods. There is no opportunity cost in getting the item, so scarce Neopian resources are not involved.

Characteristics of the Market Neopian Economy

The Limited Role of The Neopets Team

The Neopian Economy consists of little intervention from TNT. However, a framework is established in the form of originally making the goods and distributing them for sale through the shops, site features and through Random Events. TNT creates rules which users must conform to, thus stopping fraudulent behaviour. In their absence there would be no protection from such activities as using the site unfairly. This shows that TNT intervention is justified in the form of rule making and site discipline to ensure incentives for regular site players.

The Right to Own and Dispose of Private Property

One of the most important features of the Neopian Economy is right of users to own private items, and to dispose of them as they wish. The right to own private items ensures that not every other user will also have that item, so the item keeps its value. However, some individuals decide to keep the item rather than sell it on.

Those individuals who use items to make a profit are called entrepreneurs. They are risk-takers, having risked their own neopoints in the pursuit of profit. They are also decision-makers, as they decide how best to sell the item, for example through the shop wizard or the trading post.

The Existence of Profit Motive

In decisions about how entrepreneurs will sell items, they are guided by a profit motive. It is assumed that the motivating force is self interest, with them selling at the price that makes them the highest profit. Because of this, price changes provide signals to entrepreneurs, and because of the effect of price changes on profit, they react to these signals.

Reliance on the Price Mechanism

This is the most fundamental characteristic of the Neopian Economy. Prices of Neopian goods are determined by the rules of supply and demand. If a good is heavily demanded, the price will rise. If a good is not in demand, the price will fall. It is also true that if a good is in excess supply, the price will go down, as Neopian consumers would buy the cheap items first, leaving the more expensive ones untouched. Little supply increases the price of an item, as consumers have limited choice and will have to pay the specified price. This is the interaction of demand and supply between item buyers and sellers. The buyer, not the seller, is the sovereign. This is because without demand there would no items sold.

An example is avatar items, like the Chokato TGC card. Before the avatar was released, the price was relatively cheap, as demand for the item was few and far between. However, as soon as the avatar was released, demand increased. There was a limited supply of the card, hence prices rose as sellers could put them up and still sell the product.

I shall cover avatar items in more depth in my next article, and the price elasticity of demand for them.

A major disadvantage of this system is the inequality of Neopoint distribution. It is only those with the ability to buy goods that are able to influence what is sold, through demand and supply. However, the positives outweigh the negatives, and the incentive is to work hard to earn Neopoints, thus deepening the game experience.

Why do rich Neopians keep getting richer?

At first, this question seems like an obvious one to answer. However it goes a little more in depth than one would first assume.

Neopians that are neopoint rich can effectively exploit economies of scale. This means that due to their large wealth, they can buy items in bulk for cheaper prices. Also, prices can be negotiated.

They can also afford to take risks. Spending millions of neopoints wouldn’t be possible for the average Neopian, as it would be a large percentage of their total wealth, if they had that amount at all. Rich Neopians can afford to speculate, with large amounts of Neopoints not making a huge dent in their bank account balances. This enables huge profit margins for those willing to take the risk. Hard-to-sells are an example. Users can usually pick up a cheap deal on say, a rare Faerie Snowglobe on the Trading Post. Some go for millions of neopoints, but few users can afford to spend this on one item. Hard-to-sells are usually collectables, so there is in fact a market for them; however, it is limited and users are hungry for a deal. Taking the risk of speculating on these items can bring huge rewards; however, there is also the chance that there isn’t the demand for it so the price will have to be dropped when selling. On the other hand, if the right buyer is found and time is not an element in the decision, huge sums of neopoints can be made.

Bulk distribution can also be implemented. These users usually have a base of customers who buy their items, and are well known for value and/or service. This allows them to be able to sell large amounts of items with ease over the trading post and auctions.

How does advertising affect the demand for items?

Advertising in Neopia can take several forms. There are the chat boards, for example the Trade Board and the Shop Board. There is also the Shop Ads section, where users can get their shop to the top of the listing for a set amount.

Advertising exposes your items to Neopians, thus increasing the chances of your item selling. The more people that know about your item, the better.

Advertising pushes the demand curve for your item to the right, whatever item you are selling. This means you will sell more, if you are selling multiple items (like in a shop), or sell a single item (like on the trading post).

If you’re advertising your shop on the Ads section, be careful. Weigh the amount you are spending, and the exposure you will be given. If your listings are at the top, demand will increase significantly. However, if your advert is a few pages in, is it likely that anyone will see it? Furthermore, you need to be getting more sales as a result of the advert, and the revenue from these should be more than the advert cost. If you’re spending 4 million on an advert, you have to expect to pull at least that in plus the item cost to break even. Don’t bother with an expensive advert if you can’t afford it, and certainly not if your shop's not large enough. The boards are far better for free exposure.

This is the end of Part 1. By now you should understand how the market works, and why some items are more expensive than others. In the next part, I shall be looking at the MSPP, the Shop Wizard and The Trading Post; showing how understanding these markets will increase your item profitability.