The Economist ~ Money and trading in eRepublik

Day 3,892, 04:45 Published in United Kingdom United Kingdom by Spite313
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”It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”


Dear friends,

Today I want to go over the main functionalities of trading, the mechanisms behind it, and how it impacts us as players. The purpose of this article is to serve as a guide to trading in both commodities and currency, to explain some of the history behind this, and to highlight some illustrative examples.


Arbitrage

”Supply and demand constantly determine the price of commodities; never balance, or only coincidentally; but the cost of production, for its part, determines the oscillations of supply and demand”

The basic principle of arbitrage is to take advantage of differing rates of supply and demand. In the real world, that means buying products in areas where the demand is low and supply is high, and moving them to places where the supply is low and demand is high. For example, wheat might be plentiful and cheap in the American midwest, but expensive and rare in arctic regions of Canada. So you buy it cheap, transport it and sell it, and make a profit on the difference between the two prices (minus transportation costs etc.)

In eRepublik, supply and demand applies just as much as in the real world. The price goods sell at differs from country to country, depending on a number of factors I’ll discuss below. The basic principle of arbitrage in eRepublik is to buy cheap products and resell them at a higher price (this can be in a different market, or the same market). For example, if you bought a 1000 Q7 weapons for 40c per weapon and sold them for 41cc (after tax) you will have made 1000cc profit from arbitrage, without ever owning a company or earning a medal. All that is required for arbitrage is money, patience, knowledge and a bit of luck.


Price fluctuations within a market

One option is to buy and sell products within the same market. Essentially this relies on an understanding of the market, and you (the trader) predicting future price rises. There are some common minor and major causes of price rises:

- A gradual predictable increase in raw materials costs
- A major war that causes additional consumption
- Tuesdays (due to epic battles)
- Game events
- An occupation of a major producer, causing reduction in supply
- Introduction of trade barriers

Some of these are self explanatory. I’ll go over a few of the more interesting ones:

Occupations- when a major supplier of products like the eUSA is occupied, or there’s an ongoing war, this reduces global productivity. Following the invasion we saw a global spike of raw materials costs, as well as house prices. Interestingly weapons didn’t rise- we’ll talk about this later.

Trade barriers- China has a trade wall with other countries. Prices in China are consistently higher than anywhere else for this reason. With smaller markets, introducing trade barriers almost always results in higher domestic prices. Therefore if you are a citizen of a country and this happens you can usually quite easily profit from arbitrage (selling your own poor citizens down the river at the same time).



Price differences between markets

Some countries have a lot of resources, and a lot of older wealthier citizens with companies, and produce the bulk of the world’s products. A study I did a while back found that Serbia and Romania were two of the world’s biggest producers, for example. This means that their market has a high supply of goods.

However many of these countries also have large, active populations who are constantly buying products. In addition many citizens travel to these countries to buy products, which also keeps prices high. Poland is one example of a country where I think supply consistently outstrips demand. Ireland is a country where demand regularly exceeds supply.

Arbitrage between markets relies on individuals buying and re-selling goods from high supply markets to high demand ones. There are some factors to consider here:

- Licences
- Import tax
- Price spikes

You need a licence to trade with a market- they’re 20 gold. When you sell into a market where you don’t have citizenship, you pay import tax. Even if this is only 1%, that can still be a significant amount and can negate any profits (I routinely see people selling houses in foreign markets and making a loss on every sale). It’s also worth considering whether the arbitrage difference is due to temporary demand before you invest in a licence.


Further considerations/problems

A common issue with arbitrage (and managing companies in general) is sticky wages/prices. Generally this is where you would expect to see a price rise/fall, but it doesn’t happen. This is also sometimes called nominal rigidity.

The best recent example of this was during/following the US occupation, when weapon raw materials prices increased from around 4.7 to around 8-9 currency, and wages also raised significantly from 300cc to around 500cc. This meant the cost of producing a gun increased to around 40cc from 27cc: however the market price did not also rise with it.

Sticky prices can be caused by a lot of factors, so it’s hard to talk in general terms about it. In the above example, I think this was due to a psychological association of Q7 weapons with a price of “around 40cc” being good, and anything over that being pricy. A lot of sellers continued to price their goods low even though it hurt their business. In addition, there was a ‘wait and see’ attitude from a lot of producers, as they believed the costs were a temporary spike to be endured (they weren’t). Prices have started to rise now, but the profit margin is still much smaller than it was 6 months ago.

From an arbitrage perspective, many players bought up big supplies of weapons to re-sell when war broke out. However prices did not rise significantly - only perhaps 2-3 currency - and so they made smaller profits than they might have imagined. This is always a possibility and if you’re a routine trader it is usually best to offload stock and reuse the money rather than sit and hope for a long period of time.



Money market arbitrage

Arbitrage on the money market has been going on since it was created. Generally speaking there is a big gap between the gold price and currency price. It currently stands at:

1 gold = 446cc
1cc = 0.003 gold

That means that turning 1000 currency into gold yields 3 gold, which when sold yields 1338 currency. In that one transaction, you make around a 40% profit. However citizens are limited to trading 10g a day, and you can only have one active money market offer. That means your maximum profit is around 1127 currency every 10 days. Not bad if you’re a new player, but not that significant to anyone else.

If you’re a government, or have access to an ‘organisation’ (a legacy feature which is essentially an account which can do nothing other than hold currency and a newspaper) you can trade unlimited amounts of gold. This means that the amount of currency you can sell is the only limiting factor in how much profit you can make. Despite this, it’s uncommon to sell more than 50-60g worth per org per 10 days, which yields a profit of about 10g each time. 1g per day is not a lot.

If you have a tycoon pack you can do the same trick (it allows you 50g a day trading) but it’s unreliable and most tycoon pack owners just buy the gold even though it’s more expensive that way. It also requires you to anticipate when the pack will become available (as it only lasts 7 days) and you can only use it once every 10 days.

Tl;dr Money market arbitrage sucks and needs fixing (we need an admin currency bot).


Conclusions

In conclusion, it is possible to use regular differences between market prices, or price rises triggered by various factors within a market, to generate profit. With large amounts of currency on hand, arbitrage can be uniquely profitable and certainly can out-perform other investments (i.e. companies).

However it does require active management, a very good knowledge of the markets, and a bit of luck. Foreknowledge of things like game events and wars have made many players rich, and if you can get this kind of (unfair) competitive advantage you can leverage fairly awesome profits.

All change is opportunity in business. I made my second fortune at the very beginning of V2, simply because James and I managed to anticipate demand, take advantage of supply, and had the means and resources to do it. Anticipating and exploiting change is something that can launch a lot of careers. Whenever the admins announce anything, or a major international shakeup is on the horizon… look for the opportunity.

Iain