Locations
Last week, I published an article calling out Ben Bleiweiss and Star City Games for exacerbating what I see as the beginnings of a bubble in the prices of Legacy staples. As of this writing, for example, the price of Wasteland on SCG is $79.99 (out of stock) and Force of Will is $89.99 (in stock). The article that I wrote last week was, admittedly, intended to be controversial—and perhaps a bit over-the-top—in its claims, because I believe that someone needed to make the points that (1) the current price and trend of Legacy cards is out of line with what one might expect of a steady demand increase versus a fixed supply, and (2) that the actions of Star City Games in March are partially responsible—though not completely responsible—for the rapidity of the current price increases and the potential for bubbling in the market. For those of you who have not read that article, and the comment firestorm that ensued, I highly recommend checking it out.
This article is structured in two broad parts. In the first part, I will clarify my claims, which were worded more strongly than was necessary in the previous article. This was intentional, as the point of that article was to generate discussion, which it did far more effectively than I had anticipated. The second part of this piece will be devoted to responding to some of the more salient comments on the article.
Part 1: Clarification
The core of last week's article, contrary to some of the vitriol that it conjured up, was not an attempt to claim that Star City Games is an evil empire of monocle-wearing Victorian lordlings, as one of the commenters seemed to believe. The core of the article, instead, was to discuss the existence of herd behavior in cases of market failure. I apologize if my phrasing (and choice of title) last week vilified SCG overmuch, and generated the confusion.
There are two terms here that need to be explained. First, what is a market failure? A market failure is essentially what it sounds like: a situation in which the overall efficiency of the allocation of goods in a market is suboptimal. The term is a relatively new one in economics, really only dating back to the mid-1950s to the late 1950s, though examples of market failures do exist before then (such as the Dutch Tulip Mania of 1637—no, I'm not kidding, look it up).
The second term, herd behavior, is a term used to refer to the collective irrationality of crowds of people. In some cases, this irrationality can be traced to the existence of a prisoner's dilemma style of situation—in other words, a situation in which two actors who have no reason to trust each other act according to their self-interest, leading to suboptimal (or distinctly negative) outcomes for each. In other cases, the herding may simply be due to word of mouth and a collective belief in the increasing (or decreasing) price of a particular class of good.
One of the most common mistakes in trying to evaluate the existence of a bubble is the claim that all of the financial experts can be misled. There is a clear example of this in the comments to my last article, where Ben Bleiweiss states:
I've spoken to a LOT of people whose opinions I respect about the Magic Economy, and the almost universal opinion is that prices are going to continue to climb—and will stay there. There is a multiple more interest in Legacy right now than there were when these cards were first printed, and the supply just simply isn't there to meet demand right now.
The increased demand can, of course, be driven by herding itself. The point about the financial experts is more relevant. In order to understand what drives these claims by financial experts, both in MtG and in the real world, we need to unpack the causes of financial crises, to see why they might be led astray. In general, there are two core criteria that cause the majority of financial bubbles.
Criterion #1: The existence of a guarantor of minimum value or, perhaps better, a guarantor of market stability on the product in question.
In the past bubbles I mentioned in the previous article—Asia in the 1990s and the U.S. housing bubble more recently, there were diverse actors who maintained this role. In the 1990s in Asia, Thailand maintained a pegged currency, mitigating the currency risk for international investors moving into the Thai market, as well as maintaining a high interest rate at the national level, ensuring a substantial return on investment. Korea implicitly guaranteed the debt of private corporations and maintained a high interest rate as well, likewise providing the assurance of stability.
In the run-up to the housing market crash, this function was provided by the U.S. housing lenders/regulators Fannie Mae and Freddie Mac, who continued to guarantee mortgages. Additionally, the brute size of many of the banks speculating on these mortgages—through a complex financial instrument known as a mortgage-backed security—as well as personal connections to a number of officials in the Treasury department provided additional security that the banks would not be allowed to collapse.
In the case of Legacy, this guarantee is provided by Wizards of the Coast, through the Reserve List. As long as the list exists, we have an assurance that most Legacy staples will not be reprinted, ensuring a fixed supply and rigidity to downward price trends. The broad perception that Force of Will and Wasteland are overpowered, in particular given the move away from cheap hard counters (e.g., 
counterspell) or cheaper land denial (e.g. Stone Rain, Tectonic Edge replacing Wasteland/Port/Strip Mine effects) provides an implicit guarantee that these cards will not be reprinted in a major set (though they might be reprinted in premium decks or a From the Vault set). Note that this criterion is wholly unrelated to Star City Games.
Criterion #2: The presence of some form of information asymmetry, whereby one (or a small number) of actors are perceived as having privileged access to information about the value of a product (and/or stability of a market), and those actors fulfill the role of transmitting their conclusions to the rest of the market. For a bubble to happen, those conclusions must be positive; for a crash, they must be negative.
In the Asian bubble, the information focus was provided by a few actors. The IMF and U.S. Treasury greatly encouraged investment into the East Asian "Tigers," in part buttressed by the strong growth rates of those economies in the years prior to their liberalization of their capital accounts. Similarly, important hedge fund managers also led the way, such as George Soros, the manager of the Quantum Fund, who is well-known for understanding the foreign exchange market. Soros also was the flashpoint for the collapse of this crisis in 1996 and 1997. (For those interested in financial crises, I highly recommend Paul Blustein's The Chastening as an interesting primer on the Asian crisis. It is also written for the layman.)
In the case of the housing crisis, the information control operated on two levels. At the direct investment level, there were a number of books written about how housing prices would continue to go up. There was an overall sense that the markets, in general, could not fail. For instance, even as late as March 2008, Barron's (the highly reputable financial magazine) was suggesting the Dow Jones Industrial Average could reach 20,000 by 2009. As we all know, of course, the opposite happened. The bubble burst, and the stock market tanked following the collapse of a consumption boom financed by home equity loans.
At a level one step removed from the "invest now!" craze, the risk-assessment companies (Moody's, Standard & Poor, and Fitch) were promoting the idea that the mortgage-backed securities (MBS) on which banks were financing their loans were rock-solid investments. This move by "independent" risk assessors encouraged investment firms to continue purchasing up the MBS, providing the capital which enabled dirt-cheap mortgages, and drove the housing boom. Essentially, there was an information-driven bubble in the MBS market, which fueled a credit-driven bubble in the housing market.
This is the relevant analogy for Star City Games (albeit with a less complex story), brought on by their establishment of the core market driver for Legacy: the SCG Open series. The well-publicized nature of the March price increase, and the apparent (to the public at least) speed at which it happened, acted as a de facto vote of confidence in the healthy demand for Legacy, and a strong belief that prices will continue to rise. The effect is of creating a synergistic spiral in the overall market, where other market actors take their cue from Star City Games, and invest heavily into the format to try to beat the price increase. SCG thus traps itself in a situation where it must increase prices as well, which transmits yet another vote of confidence to the rest of the MtG-buying public. The cycle continues until people are priced out of a market, and then a plateau or crash follows.
A related point to the market influence of SCG is the widespread publicity of the SCG Open series. This is not to suggest that SCG shouldn't publicize the Open series—the coverage is awesome, frankly—but they do need to recognize that this publicity has a market impact. For example, how many regular GatheringMagic (and of course ManaNation) readers know the results of a monthly Jupiter Games Legacy tournament, which regularly bring in over a hundred competitors (a very large number, prior to the SCG Open, and still substantial today)? The sheer publicity and size of the Open series grants SCG substantial market authority. As but one example, the Candelabra of Tawnos/Time Spiral craze wouldn't exist without this publicity.
Thus, the reason for investment herding, which generates a speculative spiral, relates to the convergence of perceptions in a large group of people. This is generated and maintained by the existence of a guarantee on stability/value of a product, and the transmission of "pro-investment" conclusions from one (or a small group) of actors with privileged access to information on the state of the product. In the case of Legacy, the guarantee is provided by the Reserve List, while the information-control aspect is provided by Star City Games. Contrary to Ben Bleiweiss's apparent beliefs, the company that he works for does, in fact, have the ability to partially "set" or "fix" prices in the Legacy market (though probably not the Standard market, which is more diluted in terms of relevant tournaments).
Part 2: Response to Criticisms
Here I would like to discuss some of the more relevant criticisms that were raised, which I haven't fully addressed in the above explanation.
Criticism #1: Star City Games maintains the same dollar margin on its sales, despite the price increases. Therefore, they have no incentive to price-gouge.
In the comments to the last article, Jon Medina in particular emphasized this point, to good effect. For example, Medina states:
I want to be clear that although I spoke about the SCG buy list driving the prices. I in no way subscribe to the idea that SCG is doing this with any other motive than to stock for a wildly popular format. They want to give their customers what they need and I commend them for putting their money where their mouth is!
If the format wasn't this popular than SCG would not have to buy cards at the prices that they do.
When you start with 0 stock—What's the difference between buying a Force of Will for $60/ selling at $90 or buying at $30/ selling at $60 ? Nothing, it's the same amount of profit, with the added benefit that some's budget might allow for them to buy more ate $60 then at $90.
I'm not an economist but all this seems to be common sense.
I do not contest the point that SCG retains the same dollar margins on each card. In fact, I don't think it's a case of intentional price-gouging at all. The problem is not one of margin, but rather one of sales volume.
Star City Games, like any other retailer, is out to make money. They can do this in two ways: Either they can increase their margins and hope to maintain sales, or they can try to increase their sales volume. The latter approach is far more effective, as SCG is constrained on supply by how many people are willing to sell their cards to SCG. Bleiweiss confirms this point by stating that the inability to maintain stock was the chief problem in the run-up to the buy-list restructuring:
We literally could not keep these cards in stock at the old prices, and we could not pick them up in any supply at our old buy prices. If people won't sell us Force of Will at $40, I'll offer them $45. If they won't sell at $45, I'll offer them $50—and so on.
To maintain the analogy to the housing market, think of this as akin to house-flipping. The more efficient you are at flipping a house, the more money you can make, since you can flip additional houses. Furthermore, as long as you are guaranteed a certain markup on each house, the price at which you buy the house really doesn't matter, since there's always another person to sell it to at a higher price—at least while prices continue to rise. If enough people start undertaking this activity, the momentum of flipping can feed into the existing price increases to accelerate the increase, feeding into the bubble. Think of it as a snowball rolling down a hill; momentum continues to be added, and more and more material (here, people) are drawn into the ball, until eventually everything crashes at the bottom.
As a result of the snowball effect, the stocking and purchase/sales numbers will continue to support the claim that "prices are going up due to robust demand" until the bubble itself bursts or people are priced out of the format (see Part 1 for an explanation of the issue).
Criticism #1a: Star City Games didn't have the time to slowly, but steadily, increase prices.
This is another one of Jon Medina's comments:
There's no time to offer +$5 weekly until you "court" the community into selling you cards. SCG is holding a Legacy tournament every other week. They need the stock yesterday. If I was running a card shop and my customer's needed something, I'm not going to screw around in trying to get it. I am going to ensure that I have it. The last thing that I want as a business owner is for my customers to go somewhere else, while I am "Testing the Waters."
Fair enough. Given the popularity of the SCG Open series, SCG does have a serious interest in maintaining a substantial stock of staples at all times. However, there is still the question of the manner in which the buy list was updated. Specifically, there is a distinct difference between increasing the whole buy list, executing at Opens, and asking people to take a look on the website . . . and what SCG actually did, which is plaster the majority of the important buy-list changes on the front page of their website, in giant, bold letters. Bold letters, in different colors, outlined by a huge frame.
The point here, as with all herd behavior, is to ask what type of psychological shock is generated by the behavior of an important actor. The entire Legacy community, from small-time players to the regular Jupiter Games crowd, went crazy about the changes the minute they happened. I know of a number of friends who also went and sold a large percentage of their Standard collection to dealers, in order to acquire Legacy staples, either before the local dealer caught on or before the prices increased even more. People also diverted money into the purchase of Legacy singles that would have been used elsewhere, generating a false upswing in demand.
So, while SCG might have needed to increase its prices rapidly, they probably did not need to generate the sheer level of shock value that their methods created.
Criticism #2: The price change of Candelabra of Tawnos is not due to a bubble, it's due to High Tide.
This complaint, originally raised by Ben, and possibly implied by Drew Levin in his most recent article on SCG, as well as honed in on by a number of commenters on the original article, is a mischaracterization of my view. I never suggested that Candelabra's price shift was a move by SCG. In fact, I explicitly stated in the original article (and pointed out again in the comments) that it was a simple case of supply and demand. Specifically:
[Candelabra] went from being a cool old card with some interesting potential to a hard-to-acquire format staple like Moat, Grim Tutor, and The Tabernacle at Pendrell Vale. Was this change an example of price-gouging by Star City Games? No, of course not. SCG was simply the first to increase its price based on observations of buying behavior and trade discussions at SCG: Edison. There simply was a sudden spike in the overall demand for the card, and because of its privileged position to see the change first, SCG was the first to be able to take advantage of the change.
Criticism #3: A commenter by the name of Ian disagreed with my interpretation of the price increase, citing the graphs provided by the Black Lotus Project as evidence that prices have been slowly increasing for a while now, and this change is nothing unexpected or unaccounted for by simple supply and demand. Ben Bleiweiss agreed, stating that: "I really feel that the price increases are a market inefficiency correction, and not a bubble. Everything I've seen (more interest in the format, more tournaments being run, more European buying power, more Japanese interest, higher attendances) points towards this, and not a bubble," and citing anecdotal evidence of customer interactions as support.
This one is going to take a while.
Respectfully, I disagree with Ian's interpretation of the available data, and, to an extent, Ben's. Below are the links for some relevant staples. I recommend setting your view so that you can see all of the past two years, in order to appreciate my point. One thing worth noting is that all of these prices will be lower than retail, because the data is derived from eBay.
(For comparison, here is the Case-Shiller housing index from 1890 to 2010. Take note of the housing booms interspersed.)
All of the above cards, with the partial exception of Sword of Fire and Ice, show similar price patterns. In the late fall of 2009, when the SCG Open series really began to take off, Legacy staples show a moderately rapid increase in price. Over the course of approximately six months, for example, Underground Sea went from approximately $47 to approximately $70, an increase of $23, or 49%. Wasteland increased from approximately $11 to $22 over the same time period, an increase of 100%. Over the late summer to early fall, prices dropped slightly and stabilized, in general showing a gradual increase over the course of the fall and winter.
Then, around March 4 to 7, all of the price trends (excepting SoFI) have an inflection point, and increase at a rate completely out of line with the previous rates. This date corresponds to the weekend of SCG: Edison. The major event of that weekend was the emergence of High Tide as the "deck to beat" and the corresponding skyrocketing of the price of Candelabra of Tawnos. In general, what we should expect in this situation is for some short-term speculative price increase, as players drive other prices up in the irrational hope of catching the next big card, or thinking that maybe Candelabra is respective of some trend, despite its obvious status as a standalone (see Criticism #2, above). Then, prices would either settle slightly, or simply continue a slow upward trend, to account for gradually increasing demand.
Instead, what does the trend line show? It shows a continuing steep increase in prices, which persists throughout the month of March and into April. During this time, there was not any phase-shift in the popularity of Legacy. The SCG Opens were already popular, and more frequent than in the past year. It is possible, even likely, that prices were due to increase as a result of an inexplicable undervaluing of the Legacy market during the last six months. Nevertheless, the rapidity of the increase suggests that something more than a minor market correction is at work here. The only clear locus of that "something" is the restructuring of Legacy buy-list prices that Star City Games conducted in mid-March. I contend that this price shift triggered a speculative run on the extant supply of Legacy cards, setting off a bubble.
Before we move on, I would like to draw your attention to Sword of Fire and Ice, as I think it provides even further evidence of the existence of a bubble. This card shows no increase in price until the establishment of Stoneforge Mystic as a lynchpin of Junk/Rock and Bant lists in Legacy. After that point, the card begins a clear upward trend. However, again, there is an inflection point in the price curve in March—only this time, the shift is not the weekend of the Edison $5K, but rather on March 25, clearly in the midst of the SCG price reorganization. This strikes me as clear evidence of at least some bubbling already occurring in Legacy.
Conclusion
Let me be clear here, I do not think that SCG is intending to gouge its customers. In fact, I have always found their practices to be fair in the tournaments I have attended, and I have found their service to be reliable. Nevertheless, I do think they should assume some responsibility for the current pricing trends in Legacy. It is probably true that prices needed to increase on the majority of Legacy staples. The rate of change over the past six months was too slow to account for the increased demand. Thus, I do not take issue with some increase in price. What I do take issue with is the manner in which prices were changed, most particularly the suddenness of that change. If SCG had increased its prices by $5 per week over the course of March, across the board, on Legacy staples, I do not believe that we would be seeing the speculative mania that we are now. True, SCG would not have done the same sales volume as they have recently, but we would also not be faced with the real potential for a persistent bubble, as the shock to the collective psychology of the market would have been far smaller.
P.S. For those who are interested in where I think the bubble will head, and some of the complexities associated with the MtG market that aren't present in "normal" financial markets, I will have an article on that topic either later this week or next week on the subject.
