This article is about the market of dota 2 item trading. All information provided are based on official information provided by Valve (dota 2 store). The market of dota 2 item is interesting to analyse and can yield various findings, which can be used for buyers and sellers in this market to achieve market equilibrium. Post Olygopoly The market of dota 2 items is an excellent example of post oligopoly, similar to other goods and services such as fast food, financial services and insurance services. Although some aspects of it resemble classic monopolistic (large number of sellers etc.), two aspects, the degree of power of the dominant seller (in this case, Valve); and the homogeneity of the goods offered, affirm its statue of post oligopoly. Price Determination Post oligopoly has one very simple characteristic, price determination. Dominant seller, such as Mcdonald’s in fast food industry, Coke in the “cola” industry etc. has the absolute power of price determination and other sellers simply follow its price / close to their price. The dominant seller sets their price based on the demand they receive from the buyers and since they are the most powerful seller, they have the ability to manipulate buyers. The reference prices (hence, the market price) of steam store items (couriers, bundles, keys etc.) are the price demanded by buyers as perceived from Valve, making it the most suitable price to be followed by other smaller sellers (in the dota trade forum). Under perfect market condition, a $10 item should be worth two of $5 items and vice versa. However, this is not the case. Market Failure The trade posts from most dota 2 trade forums, aka offers from buyers and sellers, are perfect resemblance of market failure. The source of the market failure demand side shock (as with most other macroeconomic conditions). Buyers often offer price that are way below market price (I’ve seen many offer 1 key for a courier worth 4-5 times its value). That is not a problem under perfect information condition. Sellers should have the information to ignore such offer. Source of Market Failure - Information? However, in this market, as with many post oligopoly markets, information is very scarce. This has negative psychological effect to the sellers and they misinterpret such market failing condition as ideal and accept it. That’s the reason we see many sellers offer some couriers for 2 keys, a discount of 50% under market price. Regulation However, a crucial difference between dota 2 items market and normal post oligopoly market is that both barter system as well as monetary system are used for normal transaction. Since barter system are harder to regulate, and information of barter system is harder to monitor, dominant party and regulatory party should be given the responsibility to regulate it (example of such system is international trading where both systems are implemented. Hence, every industry needs a worldwide regulatory market for international trading to prevent fraud / discrimination). In a way, the problem of market failure for dota 2 items market resemble labour market discrimination where certain labour are exploited and paid relatively low wages by firms (since most sellers of item obtain them either through playing dota 2 game, or through purchase, the costs of obtaining item are the price of labour, or wage) In short, this condition is called “market friction”. Refer Mortensen (2005) and Pissarides (2000) for more information on market friction. Both of them won the Nobel Prize in Economics in 2010). Short Run Solutions In economics, there are two good short term solutions. First, the dominant sellers / regulatory party (both are Valve) can improve the information condition of the market by providing more references to both buyers and sellers. Such move can help adjust the market back to the equilibrium and ensure short term stability. Buyers and sellers can refer to the market price whenever in doubt (this has been done as discussed earlier, since Valve already listed the price of all items in numerical terms, hence buyers and sellers should be able to use simple calculation to determine the prices under barter system). However, such information can be diluted with the categories of items available. For example, the Fireborn Odachi (priced at $4.99) are categorised as “mythical” while the Axe’s Sylnasher the Winged Axe (priced at $5.99) is categorised as “rare”. These terms perhaps provide misleading information during normal transaction. Unless there are important reasons, the categorical system (common, uncommon etc.) should be abolished as they can be misleading. Numerical price is more than enough to serve as reference (perhaps categorical system only implemented when items are not available in dota 2 store such as Pudge’s hook or Tiny’s ice skin). The second short term solution (and the more extreme solution) to such problem is to implement price control system. Since the source of the problem of such market failure is the demand side shocks, the regulator (which is Valve, again) can implement price-floor control. Floor price can be set to ensure market failure is in manageable level in short run. Hence, price cannot be manipulated under certain level. This will ensure the rights of either party to be protected. Floor-price is implemented in many good/service markets and labour market (minimum wage). Long Run Solution However, the best long run solution for such problem is the automatic adjustment of the markets (buyers and sellers), aka invisible hand. Market price will be reached when both buyers and sellers fully understand their powers and information. Under most markets this is doable in the long run. However, dota 2 items market possesses difficulties to reach such long term equilibrium as the life of this game may not be long enough to reach such scenario. Furthermore, players of dota 2 may not have the initiative to ensure market failure can be corrected. After all, as quoted by John Keynes himself, in the long run we are all dead (in this case, the game is dead) So, all and all, I hope this article can provide an insight of dota 2 item market (from my perspective). I truly hope to be able to help correct the market failure that encountered by the market now. Besides, hopefully this article can provide information for buyers and sellers in their trading of items. p/s: I am doing my phd in economics (monetary and econometrics) and a lover of dota / dota 2. I plan to write an article of dota 2 item market soon and this is the early abstract of such article. I welcome any comment from anybody including troll comment. To the moderators, I am not sure of which sub-forum to post this article so i am posting it in "dota chat".