In General: MTG Economics Part 1: The Primary Price

Hello and welcome back to In General. On Sunday's here at TGZ we talk about anything and everything related to Magic the Gathering. Today, I am beginning a four-part opinion/educational piece on the economics of MtG, starting with everyone's favorite scapegoat: MtGO.

You can ask anyone in town, they will all have a few complaints about Magic Online. Specifically, I am going to pick out something that has been bothering me since the very beginning of online play: the cost structure.

Market Control

If you want to purchase a physical MtG sealed product, they are pretty expensive. There are certainly costs to creating and producing the game, but those are relatively small. Primarily, what drives up the cost of Magic cards is demand. While Wizards works to make the game appealing and grow the player base, the demand for cards is largely outside of the company's control. Some sets sell better than other. The reason for this is the strength of the product and people's interest in it.

Things are a little bit different when it comes to Magic Online. The costs of maintaining the program and providing support, etc., are still definitely there, so it could never be free, but there is no scarcity. A mint condition Black Lotus is expensive because only a handful still exist and thousands of people want one. Black Lotus is expensive on MTGO because Wizards has decided it will be that way.

By restricting the supply of new electronic cards 'produced' they keep the price of electronic boosters and other sealed product high, which they can then continue to sell for 99% PROFIT.

I fully endorse Wizard's right to run a profitable business and make money by entertaining people. That is their right as a corporation. But make no mistake, there is no real correlation between the price of an electronic booster pack and a physical one.

They don't require the same materials, don't trade in the same market, and don't suffer the same economic constraints, so why are they the same price? Actually, electronic boosters are usually more expensive from the Wizards online store than they are in real life. Tying these prices together is a convenient way for consumers to visualize and accept the costs, but in actuality this represents a clever price fixing scheme by Wizards.

Consumer Protection

When you provide a product to consumers, you should be required to disclose the extent to which you a Market Maker in that particular product and what your Compensation, if any, is for facilitating that transaction.

A market maker is any entity that has a way to control the supply, and thus the price, of a product. If you are a dealer with an inventory position, you are a market maker, provided you have at least a small percentage of the market under your control.

Compensation is pretty straightforward. I am not saying that every dealer needs to provide a full income statement and balance sheet with every candy bar they sell, but interested consumers should be given the opportunity to scrutinize such information at their request, if only in the interest of consumer protection.

Savvy readers may have picked up the language and rules that I am referencing. This is securities law. In the United States, nationally traded securities are regulated by the Securities Exchange Commission, which utilizes these rules for enforcing proper disclosure of material facts to consumers BEFORE THEY BUY.

Servicing vs. Profiteering

I am an adamant supporter of consumer protection. Not necessarily consumer protection LAWS, which are often politically motivated and have only modest effectiveness, but rather responsible business practices.

If a man was dying of thirst in the desert you would give him some water, right? Well, if you always did it for free, soon you would be out of water yourself because people would take advantage of your kindness, so you need to regulate the price somehow. You also don't want to charge extortionate prices because that will turn people away from you, shrink your market share, and most importantly: it won't serve your customer's needs.

I am arguing that, by pegging the price of online boosters to physical boosters AND artificially restricting the supply by only presenting limited public offerings, Wizards is behaving in an anti-consumer way. They are charging a fixed, theoretical maximum for a product which has a negligible marginal cost to produce. They hold a monopoly position, which is unavoidable because they created the game themselves and it is their intellectual property, but for those who are not inclined to an in-depth economic analysis, suffice to say that this situation usually ends poorly for the consumer.

Charging the highest prices that you can while optimizing sales is a typical indicator of a profiteering business model. A servicing business model is one in which you voluntarily charge lower prices to build up loyalty, trust, and social equity with your customers.

At the beginning I promised that this would be an opinion piece, so in case you don't think that you have gotten your money's worth, here is my final opinion on this subject: Companies, particularly someone like a toy manufacturer who brings so much joy into the world, should use a servicing model for pricing their products, NOT a profiteering model.

Join me next week Zoners, when I discuss why Magic isn't a great investment. Oh joy!

-GG