Arbitrage and equilibrium in the Team Fortress 2 economy (2012)

Summary

Arbitrage is the holy grail of every trader. The dream of buying low and selling high (for this is what arbitrage is all about) is the driver of all commerce but also its own worst enemy: for as everyone is trying to pursue it, the potential for arbitrage disappears. And when it does disappear totally, we have equilibrium (the holy grail of the economists). One of the problems of living in the analogue world is that these concepts (e.g. arbitrage and equilibrium) are extremely hard to pin down. No one has enough information on how actual prices diverge from their ‘equilibrium’ level so as to be able to measure, or to visualise, the potential for arbitrage. All we can do is guess what it might be. Not so in our digital economies. The following diagram, for instance, captures the room for arbitrage (what we call an Index of Arbitrage Potential for Steam trades of Team Fortress 2 items) as it arose during the period 13th November 2011 to 23rd May 2012. The peaks represent moments when there was a great deal of room for arbitrage (i.e. for buying low and selling high), while the line’s thickness reflects the volume of actual trades. It is no great surprise that these peaks coincided with major new releases and sales (e.g. the Christmas sale) that the community required some time to price properly. Where did this Index of ours come from? How come we could compile it for our economy when no economist can compile a similar index for the ‘real economy’ out there? The answer to the second question is simple: Unlike the analogue economy (where we can at best sample some prices at discrete points in time), at Valve we have all the real time data there is, courtesy of Steam: a peculiarly sophisticated barter economy. Let me explain why I am calling it ‘peculiarly sophisticated’ before explaining how we put together our graph above. A peculiarly sophisticated barter economy Steam enables Valve’s gamers to trade freely with one another, effectively to establish a substantial econ...