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On May 15th at 3 A.M. PDT, the heavens will tremble and Diablo 3 will be live. Players will be able to scour Sanctuary for gold and epic loot and trade it on the in-game gold-based auction house immediately, and a week later, the real money auction house will open, where players can trade their items with other players for real world currencies.

The recent announcement of the fee schedule for the “real-money trade” (RMT) auction house had some players astonished at the prices. The fee for the gold-based auction house is 15% of the sale price and while the real-money auction house matches that 15% for “commodities” (e.g., stackable items, gems, materials, dyes, etc.), it charges $1 for equipment and unique items. These fees are charged to the seller and deduced from the money they receive from the sale of the item. Additionally, the real money revenue is credited to a Battle.net account balance; if you want to be paid and withdraw the funds to Paypal, this incurs an additional 15% charge. Once you get the money into Paypal, you can transfer to a bank account for free, or do anything you could normally do with Paypal credit.

If you are at all familiar with Blizzard’s other major auction house system, the WoW gold auction house, you might notice the similarities and differences easily. Here’s a quick rundown of WoW’s auction house fees:

• 5% of the sale price on same faction auction house (99% of the trading), 15% on neutral auction houses
• Players must put down a deposit when selling items. If the item fails to sell, the deposit is not returned. The deposit varies based on the length of the auction and the vendor value of the item.

If you find a leet sword and sell it on the AH then want to use the funds in real life, this is how much money you are getting:

You probably aren’t going to get much for farming lots of small items if you sell them on the real-money auction house, as that $1 fee takes most of the sale price. This is slightly disappointing, as it means we probably won’t be seeing a whole lot of super-cheap items to buy and will have to plunk down a little more to get our items. I’m sure there will be some available, but it might be more reasonable to buy these items in the gold auction house for items below the $15 mark.

One thing to keep in mind is that gold itself will be buyable on the real-money auction house. This means that you could sell a cheap sword for gold and pay the 15% fee, then sell the gold for money and pay the 15% fee again. This might seem like a big hit, but it works out to about a 28% fee, less than the $1 + 15% fee for some transactions. This assumes that there is a constant gold-to-money exchange rates at all levels and items are priced according to this rate, which may not be true. Lets pretend that $1 buys 100 gold. This conversion rate is entirely made up and isn’t going to be at all accurate, but it makes the math easy. The below table shows how much money you’d get from selling the items for gold and converting it to a real-money balance as opposed to doing so on the spot.

The left column shows a variety of gold values you could sell an item at, while the second column shows how much gold you’ll actually receive. The third and fourth column shows how much money you could get for that gold if you sold it on the real money auction house (depending on which method you choose), and the fifth and sixth column show much much money you would get if you sold it at equivalent prices on the real-money auction house. For transactions below $2.60, it is better to get gold on the spot and sell it for whatever balance you prefer later. This means for the cheapest level of transactions, gold will likely be preferred, even if players want to cash out anyways.

This, of course, assumes that players are savvy and will make decisions to maximize their profit. There will undoubtedly be people, regardless of the best decision, who will be uninformed of the fees or indifferent to doing research and sell their items at $1.50, only netting them $0.50 instead of $1.08. However, I think that there will be enough big players and big market forces that prices will largely follow rational pricing. Here are some of the reasons:

• The auction houses are big, (nearly) region-wide. Imagine all of the WoW servers using a single auction house: undercutting would happen every second and prices would be driven down to the lowest feasible price.
• The incentive, for at least someone, is real money. Even if the things in question are just items and gold, they are convertible to real money. Students and kids with free time, as well as unemployed people and other low-wage people will be willing to “work” even if the margins and money per hour are low. If there is an opportunity to buy something on the gold auction house and relist it as an undercut on the real-money auction house, it will happen, and vice versa. Any price discrepancies will be “fixed” by market players looking to make a profit.

This leads to an interesting question: is there going to a floating gold-to-money ratio, or does the fixed $1 fee throw a wrench into gold valuation? What is gold going to be traded at?

Gold clearly has different values for different levels of transactions. If there is some average level, like our 100g to the dollar example, I would prefer to trade in gold for cheaper transactions: I would rather receive 127.5 gold than $0.50 Battle.net. On the flip side, I would rather get paid in a Battle.net balance than gold on the auction house above $2.60: even if I want gold, I can use the higher levels of Battle.net money to buy more gold.

The $2.60 result is independent of the actual exchange rate. But, if people increasingly buy more cheap items sold than expensive items, the “average” gold price in dollars will go up. This is because prices will be lower in gold. Sellers will prefer to use gold and pass at least some of the savings onto buyers; I’d rather “give” a buyer a $.10 “discount” than a $1 fee to Blizzard. On the flip side, if players primarily buy more expensive items, the fees will be less in Battle.net balance than gold, and prices will be lower on the real-money auction house. The price of gold will go down, as people will sell their gold to use the cheaper real-money auction house, even if they themselves never add funds from a real-world source.

Of course, these market forces are only part of the story. They are an immutable part of the story, unless Blizzard changes its fees, and their effects depend on how many transactions happen at each price level. Other factors include the willingness of players to add real-world funds; if players become more willing to do this, real-money auction prices, including the price of gold, will go up. Changing psychological aversion to trading in real-world currency amounts will affect prices, well as a “gold rush” mentality of wanting to make money from playing a game.

While this tells the supply-side of the story well, the buyers sellers of gold who go onto buy real-money items will also run into the 15% fee. As such, they are not indifferent about which currency they would like to use and cannot simply trade at the market rate for free. Luckily, the fee of 15% for selling equipment on the gold auction house is the same as the 15% charged to sell gold, a key point that makes sure everyone’s optimal price levels are in line:

Again, $2.60 is the magic number at which the real-money auction house prices will be lower, ceteris paribus.

The question is my mind is this: why did Blizzard choose these fees? Could a different fee structure be more beneficial for players and Blizzard? We’ll look at this later this week.