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Economics, FFXI, Gil Sellers and YouFollow

#1 Oct 30 2004 at 12:10 PM Rating: Excellent
Sage
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562 posts
I've been wanting to post something like this for a long time. I put it off recently because I saw that a good majority of Allakhazam posters understood some of the concepts I'm gonna explain here. But after seeing the responses to this post: http://ffxi.allakhazam.com/forum.html?forum=10&mid=1098985640976477473 it is my understanding that this might be needed.

I'm gonna divide this up into 6 parts. Supply, Demand, Equilibrium, Undercutting , Gil Sellers and Q&A. In those sections I will explain why those who understand economics undercut and still make profit and why gil selling will never go away.

If some of you see this as a 'dead horse', I'm sorry. I'll try to throw some unique concepts in there.

First, the basics. Please bear with me, I'm gonna try and cram a full year of basic economics into a single post.

Let me first establish that a Monopoly system will not be factored into any of my explanations for the ease of simplicity. Yes, I know it happens, but if you really want to see the impact of it on Supply, Demand and Equilibrium I suggest you enroll in a economics class at your local university.

Since I can't post images inline, links to images of graphs will have to do.

Law of Supply


Without defining the law of supply, it is basically a upward sloping curve with price on the vertical axis and quantity on the horizontal axis. A higher price for an item results in more people willing to supply the item. A lower price results in fewer suppliers.

http://robyngreen.com/ffxi/supply.gif

The best way to think of supply is the NPC price of any given object. For example, if rabbit hides begin selling for $2,500 gil to NPC, would everyone agree that the amount being farmed would increase? Likewise if the NPC and AH price of rabbit hides was under 3 gil, the amount being farmed would probably decrease. This is the basic law of supply. As the price per item increases, the more people are willing to supply said item.

IMPORTANT: Demand was NOT factored into the above equation.

Law of Demand

Again, without defining the law of demand, it is basically a downward sloping curve with price on the vertical axis and quantity on the horizontal axis. The higher the price of an item, the less of a demand there is for it. The lower the price, more demand.

http://robyngreen.com/ffxi/demand.gif

The best way to think of this concept is the price of any rare drop. Let's use the Emperor's Hairpin for example.

DO NOT think about supply when visualizing this example. We are not talking about supply here, only demand.

If the current market price for the Hairpin is $500,000, the demand for this item is going to be relatively low (higher price, less demand.) However if the price was instead $15,000, demand would be greater (lower price == greater demand, more people want it.)

Equilibrium

Ah, now starts the fun stuff and a few 'ah-ha!'s from our crowd I hope.

What happens when you factor both Supply and Demand into an equation? Well my friends, you get what we call Equilibrium.

http://robyngreen.com/ffxi/equi.gif

An important note, all Market Economies will fall into an Equilibrium at some point. It is my understanding from playing this game for almost a year now that FFXI has a Market Economy, although it has a few loose ends here and there.

This is where we get the current market price and we also get to play with Supply and Demand.

Let's go back to our Demand example, the good 'ol Emperor's Hairpin. You remember the demand curve for that example, right? Well guess what happens when we add Supply into that.

http://robyngreen.com/ffxi/equil2.gif

Wow, look at that. We've got the current Market Price (or recent history at AH) for the Emperor's Hairpin. Five will sell at $380,000. Fascinating isn't it? I think so.

But wait! Look, we've got a bevy of Thiefs and Rangers approaching lvl 24! Oh my, what's going to happen to Equilibrium if just Demand (D2) is increased?!

http://robyngreen.com/ffxi/equil3.gif

Well look at that. If demand increased without an increase in supply, the price goes up. Hmm, looks like those of you who want that Hairpin are somewhat responsible for the increase in price, wouldn't you agree?

Now those Thief's and Rangers are buying the hairpin and quite a few people have noticed the jump in price as well, so they start hunting down that wily Emperor himself. As a result, supply (S2) is increasing but demand (D2) is staying flat.

http://robyngreen.com/ffxi/equi4.gif

See how the price goes down? It's not undercutting, it's the economy shifting into Equilibrium.

If this is still kinda fuzzy to some of you, draw out these graphs on a sheet of paper and play with the curves remembering this - an increase in Supply or Demand shifts the line to the right, while a decrease shifts it to the left.

This leads into my next topic ...

Undercutting

Having seen Supply and Demand interacting with each other, it should be clear now that those who play this game and have some grasp on the concept of S&D will undercut when necessary.

Some of you may not like this statement, but I'm sorry. It's just the way economies work.

If you go to sell your stack of beehive chips and there are 75 on the market when you place yours, if you do not feel like the demand for this item will increase, you will undercut to sell your item. Plain and simple.

Why? Well, the supply has obviously increased and - as we all know from our Equilibrium example above - if demand does not increase to match it, the price WILL fall. No if, ands or buts about it.

I know what you're thinking. "Well, if no one undercuts, then the price will never go down and I'll make more gilzzzz you l4m0rz, so stop undercutting". I'll respond to this in the Q&A section.

Subsequently, you can also make gil by recognizing this. Same example as above, but let's say that there are only 3 stacks of beehive chips for sale. Understanding S&D, alarms should be going off in your head saying "Hey, I know demand for beehive chips is pretty high being a low-level synth. Supply has shifted backwards, so therefore the Equilibrium price is higher. I should sell mine for a bit more than the last selling prices because I know the demand is there for them."

You should also recognize that there are two players when it comes to setting the current price. Suppliers and those who demand the item.

If the price is falling, why not blame the crafters who no longer demand that object as well as the 'l4me' under cutters?

I'll tell you why - because it's just as ridiculous sounding but for some reason it's easier to see and blame the suppliers.

Gil Sellers


"WTF, why is he putting Gil Sellers in with an Economics lesson," some of you might be thinking. Well, the answer is simple. I've seen a few posts here on how to control gil sellers, what can be done about them and are they ever going to go away.

Using economics, you can understand gil sellers better and what the best course of action is to bottom-out their market.

How? Well, gil-selling also has a Supply and Demand graph with supply and demand curves that are very responsive to players.

Are the ideas still not going off? Ok, let me explain it a bit more in detail.

What would happen to the price of gil if the supply was to suddenly increase without a demand? That's right, it would fall.

I think we're past this point with gil sellers. The gil selling market has settled into it's equilibrium and as long as demand does not keep increasing, it will stay around this area for a while.

Did you catch it? Ok, here it is. Forget trying to disrupt the economics of gil selling by only focusing on the supply graph (i.e., killing gil sellers, taking their mobs, etc). As it is right now, there's enough demand for it that they'll just find another way to make gil to sell.

There's another factor to the equation that just as directly relates the number of gil sellers and is perhaps easier to control.

That's right, demand. If demand for purchased gil was to fall, the amount of gil supplied (i.e., number of gil farmers) would have to decrease to keep their market alive. If the supply side isn't responsive to the demand, the market will bottom out. Less demand results in a cutback in the amount supplied.

So talk to your friends, LS mates and party members. Try to explain to them that, if they buy gil and they see it as a victim-less crime, how it directly affects a larger number of people.

Try to control that demand side of gil selling, not the supply. If the demand is high enough, gil sellers will always find a way to supply the gil, no matter what you do to stop them.

Q and A


  • "But why undercut? If everyone sells for the going price, then prices will never fall and we'll always get all our gil"

  • There's actually two parts to the answer. The first one is, well by not undercutting when supply has exceeded demand you are basically spitting in the face of hundreds of years worth of economic principles. It's very hard to control the market in this way.

    The other answer is that this is real life and that simply can not be done. Are you going to /tell ~70 people "OMGWTFBBQ st0p undercuts muh gilz! Only sell fo' dis price, n00b" and have them all go "Gee sir, I was simply factoring in Supply and Demand when I set my AH price, but your plight for more gil has made me realize the errors of my way. From now on, I will always sell my items for the current AH price, no matter if there's 3 on there for sale or 3,000. Thank you very much sir".

    No, I don't think so. You can't realistically expect to control the selling price of every item on the server, so just relax and play the market game. I promise you, you'll come out ahead.


  • "So, are you saying this market is perfect and always, 100% abides by the rules?"

  • Absolutely not. There are flaws (monopolies on certain items, 'inexperienced' people selling items, etc.) But overall, the economy of FFXI does adhere to the rules of Supply and Demand. Now I know some people do undercut prices unnecessarily, but if you truly understand Equilibrium, you'll see how the market will suffer a temporary setback (i.e., don't sell your item just yet), but will always bounce back to Equilibrium if neither Demand or Supply has shifted.


  • "OMG, [item x] has fallen in price from 50k, to 10k in just a few weeks! Stupid under cutters, they're ruining my gil making methods"
  • *sigh*, have you been listening at all? I'm not going to restate all the principles outlined above, but a shift in the S&D curve has happened, and the market has readjusted. Your 'honey spot' for gil has gone away. Be a good capitalist and move on and find another way to make gil.


  • "People who undercut are lazy and just want their gil faster."

  • While I think this may be about %20 true (thanks to some people fully admitting this), it really has nothing to do with the market price. Not all under cutters just want faster gil, they simply understand the market.

    Those people who want faster gil may provide a few bumps in the Equilibrium price in the short run, but this isn't something new. It happens in all economies. Just hold your items and wait for the market to adjust itself.

    And no, if the demand for an item is truly there and the price is not artificially inflated to begin with, there will be no domino effect with the price as a result of a couple people shortsightedly undercutting.



    This concludes my basic lesson in economics. Thanks for reading it to the end, I know it's been long. I hope I've made clear, concise points. In some instances, I hope I've offended some people.

    Now that many of you are more educated in the ways of economics now, go out unto the world and make more gil!


    Edited, Sat Oct 30 13:16:41 2004 by Whales
    ____________________________
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    FFXI - Fellows - Gilgamesh

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    #2 Oct 30 2004 at 12:47 PM Rating: Excellent
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    351 posts
    You left out one very important factor in your treatise.

    <<TURN>>

    TURN is a basic retail concept, that simply describes how quickly you can turn your merchandise over. Generally speaking, it goes hand in hand with your ON HAND, and OPEN TO BUY, but to put this in FF game terms........

    Each character doesn't have the ability to infinitely place as many items as they wish.

    Since a character at best can sell 7 items on the AH, and if they are so inclined, a few more in their bazaar, they are limited in how quickly they can turn their merchandise.

    If they price too high, then they are not opening up new slots to sell the merchandise, and thus, while they may get a higher price for their merchandise, they will have a much slower turn.

    I may have 25 stacks of beehive chips "on hand". These 25 stacks sit in my 'warehouse' and take up space. As long as they sit there, I can't bring in more merchandise, since I have no room.

    Because my warehouse is full, and I have no capitol from said merchandise, I also have no "open to buy", which in game terms means I can't go get more merchandise to move.

    Ultimately, TURN must be factored into the equation. A faster turn may cost you some gil, but it also allows you to turn your merchandise over and recoup it in quantity, versus quality of price.

    Of course, if you set your turn too fast, your ability to refill your warehouse to create the next turn cycle is impaired, as you won't have enough inventory on hand to turn.

    So ends LESSON 1A - Retail Concepts - Addendum to above post.

    Khurr - Retail Manager - 20 years plus

    #3 Oct 30 2004 at 12:55 PM Rating: Good
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    367 posts
    Well you made me remember high school macro and micro economics but thanks for the refresher. Great post and relatively simple for people to read
    #4 Oct 30 2004 at 1:08 PM Rating: Good
    Very good post, but for some reason I have the feeling someone or other is going to rate you down...

    Rate up from me.
    #5 Oct 30 2004 at 1:11 PM Rating: Good
    Go figure, in the time it took me to rate you up, you got rated down...
    #6 Oct 30 2004 at 1:14 PM Rating: Good
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    6,318 posts
    A question about undercutting...

    Isnt it only undercutting if there is a price that has been agreed on by all parties involved?

    For example.. If the world price for crude oil was $54/barrel, there is an agreement by everyone that sells oil to sell at the same price. If one person was to undercut, everyone would eventualy loose out, because they would have to lower their prices to match. This is why things like OPEC were formed, right?


    However, there is no OPEC of the Auction House. No one has every asked me to sign a contract that says "I will only sell at the current market price." Thus, is it still technicly undercutting, since people are selling goods at the price it is worth to them, not what the market dictates?

    This is an honest question. It has been a few years since my last econ class. (stupid acrual accounting...) thanks.

    #7 Oct 30 2004 at 1:22 PM Rating: Good
    PsiChi, you are correct.

    And look at all the rate down bombs to everyone...

    Damn karma trolls. At least have the balls to state your opinions. That's the problem with 12-year olds; They don't like to think that anyone but them could possibly be right.
    #8 Oct 30 2004 at 1:27 PM Rating: Good
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    367 posts
    Rate up for all willing to stand up and agree that this man has said something valuable to the thread... dislike trolls... but like the mythical creature that can't stand the light of day these ones also are not willing to show their faces and state why they are rating people down...
    #9 Oct 30 2004 at 1:59 PM Rating: Good
    26 posts
    While I do agree with a lot of this, there are a few things I need to point out to others, to show that, while S&D play a major role in FFXI, it isn't always the case, nor the reason of prices falling/raising.

    In my opinion, undercutters are a major role in a lot of cooking items, and most guilds, in that matter. I'm sure everyone knows by now, that both guilds and chocobos, will be more expensive by the amount of buying power. The more who have them, or have bought them, the more the item will be. This applies to your post, but there are a lot of lower level items which HUNDREDS of players on any given server can make, or do. Things like Emporer hairpins and the like do follow S&D, but thinks like Meat Mithkabobs and Melon pies only touch the surface. There is an Equilibirum for these items, but, unfortunately, ANYONE has the ability to make these, and the supply, at almost any given time, is never-ending. I'm sure on most servers, Meat Mithkabobs run from 2-4k, depending on the time of day, and the actual day. I believe that most people have a verbal agreement of these things, and its respect to adknowledge this. But some don't, these are considered the 'undercutters'. People who usually don't need the profist as much, or just want to lower the price of something. Now, I don't know about a lot of people, but 3k, to me, is not much, but these people try to lower the price by 100-200 at a time. I don't know about the rest of you, but I only make 1-2k off of a stack of ingredients, per mithkabobs. This may just be a personal pet peeve of mine, but in cases where something should have a set price, such as food, I think that undercutters are horrible for the economy.


    As such for S&D being the same as real life, theres just one little catch.....this isn't real life. People don't need food or drink, or even to wear clothes, its not a need, its a luxury. Prices will fluxuate because of this, therefore making an economy in a game a lot more sensitive, than in real life. But again, we're talking about real life economics, so you have to factor in that people turn a WANT in to a NEED. Just some things to think about undercutters, and real life economics to FFXI economics.

    I even made an account for this, never needed to post before. >_>
    #10 Oct 30 2004 at 2:06 PM Rating: Good
    Sage
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    562 posts
    Thanks all. I was really looking for feedback for this more than anything else. As far as the rate-downs go, I don't really mind it. My main goal here was to inform everyone possible as to the economics of the game, why prices shift and that undercutting with Supply and Demand is not only intelligent, but expected.

    Rate-downs just tell me that those who didn't know this are reading it and now understand - although they probably still don't like it.

    Quote:
    If the world price for crude oil was $54/barrel, there is an agreement by everyone that sells oil to sell at the same price. If one person was to undercut, everyone would eventualy loose out, because they would have to lower their prices to match. This is why things like OPEC were formed, right?


    However, there is no OPEC of the Auction House. No one has every asked me to sign a contract that says "I will only sell at the current market price." Thus, is it still technically undercutting, since people are selling goods at the price it is worth to them, not what the market dictates?


    I could write another page or two just an Cartels, but in simple forms:

    Most economists agree that today, OPEC is failing. There are certain conditions to be met before a Cartel can be successful. OPEC is currently not meeting those conditions.

    As with a FFXI Cartel, if 100% of the people who farm the Emperors Hairpin agree to sell for only $450,000 gil, then yes - they would be able to control the market.

    But as with all Cartels, this system can be ruined if either:

    A - There are too many members of the Cartel
    B - There is no way to enforce (punish) those members who don't play by the rules
    C - Some members have outside interests (making money faster)

    Now, imagine trying to get a bunch of FFXI players to *NOT* meet any of those three criteria and form a Cartel.

    In theory, a Cartel of an AH item could work. In reality, probably not.

    I hope this answered your (valid) question.
    ____________________________
    FFXIV - Fellows - Fabul
    FFXI - Fellows - Gilgamesh

    [ffxivsig]286961[/ffxivsig]
    #11 Oct 30 2004 at 2:07 PM Rating: Good
    <Congratulations!>

    I lurked here for a while before I saw topics which inspired me to create an account and post. IMO, it was worth it.
    #12 Oct 30 2004 at 2:10 PM Rating: Good
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    367 posts
    Kileah wrote:
    As such for S&D being the same as real life, theres just one little catch.....this isn't real life. People don't need food or drink, or even to wear clothes, its not a need, its a luxury. Prices will fluxuate because of this, therefore making an economy in a game a lot more sensitive, than in real life. But again, we're talking about real life economics, so you have to factor in that people turn a WANT in to a NEED. Just some things to think about undercutters, and real life economics to FFXI economics.


    You present a good argument... however there is a small flaw in the above statement. That flaw is in the word 'need', we play a game where if you want your character to get ahead in the game they are required to purchase weapons, armour, spells and food. Hence even though it is not real life it is a need for them.
    #13 Oct 30 2004 at 2:15 PM Rating: Good
    Quote:
    As with a FFXI Cartel, if 100% of the people who farm the Emperors Hairpin agree to sell for only $450,000 gil, then yes - they would be able to control the market.


    Bad example. A cartel is able to succeed by lowering supply below what it would normally be, thus causing higher prices.

    The supply of Emporer's Hairpins is fixed by S-E, assuming the fly is camped 24/7. With a fixed supply, the current price on the AH already reflects the maximum price sellers could get.

    I tried to explain this concept in the Sniper's Rings thread, but was rated down massively for it.

    #14 Oct 30 2004 at 2:25 PM Rating: Good
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    367 posts
    people don't want to hear reason and truth. hmmm didn't know Preseident Bush was a ffxi'er and a member of Alla

    I have noticed that some individual(s) have taken to rating everything I have posted today down... so what.. still going to post

    As for the cartels comment... it may have worked if OPEC had gotten all the oil producing nations into the cartel... however Canada, the United States and many other nations were not part of the cartel and therefore there was a bit of a flaw in that
    #15 Oct 30 2004 at 2:27 PM Rating: Good
    Sage
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    562 posts
    Starbuckk, you're 100% correct. However to think of an item or situation in FFXI that is intentional left in short supply in order to control the market is damn near impossible.

    It was the best I could come up with. Forgive my bad example? :)
    ____________________________
    FFXIV - Fellows - Fabul
    FFXI - Fellows - Gilgamesh

    [ffxivsig]286961[/ffxivsig]
    #16 Oct 30 2004 at 2:39 PM Rating: Good
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    I realize that the OPEC example may not have been the best.. but what do you want from me? I am a psych person, not a business person Smiley: lol

    Whales: you kinda answered my question, and in re-reading my post, I realized that it was not 100% clear.

    The question is a 2 parter:

    1)What is the pure deffinition of undercutting?

    2)I remember being taught that it was only undercutting if everyone aggred to sell at a certain price to begin with... Does that mean the the "undercutting" on the Auction House is not really undercutting?

    Thanks/
    #17 Oct 30 2004 at 3:00 PM Rating: Decent
    26 posts
    Yes, 'Need' is a word that can be used in different ways in this situation. You need defense to level on incredibly toughs, you WANT +1 armor to do so better. You can still tank a monster with beetle armor, and not chainmail in Kazham. Chainmail, on Midgardsormr, right now, is about 30-40k for the full set, and beetle, a mere 10-15k. You get better defense, and you do NEED defense, but whos to say whats enough defense to a monster? As for food, food helps, people like food, therefore they buy and use it, they WANT food to preform better, they don't NEED it. Why is the price of chainmail so high, if its only 10 more defense, and 2-3 times more gil? People prefer to preform better, society turns a want in to a need.
    #18 Oct 30 2004 at 3:03 PM Rating: Decent
    Scholar
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    1,534 posts
    wow.. (Stare) so complex, i dont understand but it must be good hehe (too lazy to read all of it sorry ^^;)

    Rate up

    (ill eventually read it, dont worry, its just so long lol)
    ____________________________
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    Mecorx - Ifrit 75WAR/75WHM [Retired]
    Mecorx - Odin 99WAR/99WHM/99DNC [Retired]
    #19 Oct 30 2004 at 3:45 PM Rating: Decent
    Well, in -THEORY-, you don't -NEED- anything... you -COULD- Just play MNK and HTH barehanded and naked to lvl 75... Good luck with those invites though...

    /em runs away.
    #20 Oct 30 2004 at 4:25 PM Rating: Decent
    Quote:
    Starbuckk, you're 100% correct. However to think of an item or situation in FFXI that is intentional left in short supply in order to control the market is damn near impossible.

    It was the best I could come up with. Forgive my bad example? :)

    If all the Alchemists making Prism Powder got together and agreed to cut their production by 50%, the price of Prism Powder would rise and it may be that the Alchemists would actually make MORE gil by creating LESS Prism Powder.
    #21 Oct 30 2004 at 4:27 PM Rating: Decent
    Starbuckk wrote:
    Quote:
    Starbuckk, you're 100% correct. However to think of an item or situation in FFXI that is intentional left in short supply in order to control the market is damn near impossible.

    It was the best I could come up with. Forgive my bad example? :)

    If all the Alchemists making Prism Powder got together and agreed to cut their production by 50%, the price of Prism Powder would rise and it may be that the Alchemists would actually make MORE gil by creating LESS Prism Powder.


    Good example in theory, again, assuming none of them later decided to make more to take advantage of the higher price... But again, half of it is 'theory' anyway, so...
    #22 Oct 30 2004 at 6:47 PM Rating: Decent
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    367 posts
    Mikhala wrote:
    Good example in theory, again, assuming none of them later decided to make more to take advantage of the higher price... But again, half of it is 'theory' anyway, so...


    Very true... but all of life is just theory as well... think about it... lol
    #23 Oct 30 2004 at 7:16 PM Rating: Decent
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    218 posts
    all true.. but as far as prices go.. there are also things to consider.. price fixing and manipulation for one... illegal activities in the real world.. but common place online. Can throw a monkey wrench into this jungle economy.

    Take Ores for example. I could change the price of AH ore to 1 gil if i wanted to. Take my ore that i grew.. list it at 1 gil.. tell a buddy of mine to bid 1 gil right after I list it. Repeat.. over and over.. Now all of a sudden, the going price for ice ore is 1 gil! Will others list it for that price. of course not. I use 1 gil as an extreme example.. but say I said 100k, and repeated.. then 95k..then repeated.. then 90k, then repeated.. hmm.. looks an awful alot like what is going on in Bismarck now. On the bright side.. it appears that alot of gardeners, like myself, b/c of the price drop have stopped growing ice ore.. which in turn will force the price back up... but until then.. I have changed my gardening focus away from ores for the time being.

    That is one step I am taking to not let ;those guys; benefit.

    As far as gil sellers in particular, and the outrageous price of sniper rings now.. I Hope everyone will camp stroper chyme and take back archer rings! I plan to.

    Anyway... lets get back to the game :)
    #24REDACTED, Posted: Oct 30 2004 at 10:15 PM, Rating: Sub-Default, (Expand Post) Whales, u r one annoying nerd. The fact that you spent time writing that useless crap makes u such a damn nerd =)
    #25 Oct 30 2004 at 10:37 PM Rating: Decent
    Quote:
    Good example in theory, again, assuming none of them later decided to make more to take advantage of the higher price... But again, half of it is 'theory' anyway, so...

    It's just like the real world. The OPEC nations agreed to all cut production and were assigned production quotas, but then they all cheated and sold more than they were supposed to.

    FFXI mimics reality.
    #26 Oct 30 2004 at 10:42 PM Rating: Decent
    Kileah.
    Whales.

    Rate Up.
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