What caused such an abnormality in the TF2 economy?

Question

In the video game, Team Fortress 2, an economy grew inside of it. It had its own currency and barter systems, and everything was running smoothly. But, in time, things started to get very strange. One of the currency types, keys, started to raise in value (the price of a key was originally at 2.33 refined metal (2 refined and 1 reclaimed), but it slowly went up to 2.66 and greater). Now, the value of keys have reached 15 refined metal (give or take), and the value of many other items have gone down dramatically. For example, a sub currency, called Buds, were valued at 16 keys, but through the rise of keys, have lowered to around 5-6 keys.

My question is, what caused this abnormality to happen, and will the TF2 economy ever be able to recover back to the values they started at (without the game creator's intervention)?

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Before I go into how the economy works, I will start with currency.

The most basic currency is Refined metal. One can create a refined metal through crafting. I will explain it more in depth once I have gone over more currencies. Refined metal can be destroyed through crafting, where it and the pieces that make it can be used to craft hats and weapons.

Making up Refined metal are Reclaimed metal. There are 3 Reclaimed metal per Refined. They are obtained by crafting 3 Scrap metal together.

Scrap metal is created by crafting 2 weapons of the same class together (weapons are a common drop). For more on the drop mechanics, go to these Gaming SE questions.

https://gaming.stackexchange.com/questions/24012/team-fortress-2-item-drop-chances https://gaming.stackexchange.com/questions/322/when-does-the-weekly-drop-count-reset

Besides just weapons, both Hats and Crates can drop. Hats are the more valuable of the two, usually at around 2 refined, give or take. Crates on the other hand, have little to no value, albeit some are very expensive (some people would trade their first born for one of the rarer ones), and when a new one is released, it can have a high initial value, that decays with time.

All money used here is in USD, but the $ sign was causing errors when more than one was used.

Unlike how metal is created by users, Keys are purchased from the Mann Co store (this is the main in-game store. You can trade real world money for items here). A Key is valued at 2.49 here. There are also Hats and Weapons on sale here, but the community generally counts those as ridiculously overpriced, seeing that one of the Weapons that you can find (as a common drop) is valued at 9.99 by the Mann Co store. The Mann Co store is run and maintained by the game developers.

The main way of trading is through a barter system. Users search servers and forums for people who have the item(s) they want, and then try to trade with them. A good example of one forum made specificly for TF2 (and other game) trading is TF2 Outpost.

You might be thinking," If it is a barter system, why do prices exist?" The price part, comes from a community of people. This site, called Backpack TF is one of the (if not) biggest sites that give item value guide lines.

A link to it is here: http://backpack.tf/

The barter system still exists though. Outside of the people who do not use Backpack TF, many of the rarer items have to be traded through barter, because there are either not enough to try and create a price, or because they don't get traded enough. But, if someone gives the details on what the item was traded for, Backpack TF will try to make a price over time.

Now, time to go in-depth about crates. Crates can be consumed (along with one Key) to open it. Inside, you will find an item that was listed on content list of the crate. Most items inside of the basic crates start high, then drop down. The main type of item that does not follow this are the Unusual Hats. These rare items only have a 1% flat chance of being obtained from ANY type of crate, and event crates tend to have a rarer type. Some of these are valued at 8 Keys (give or take), while some have been in trades with more than 5000+ USD being traded for it, and even more in items.

Another way to get semi-rare items is through MvM, an extra game mode. If a player "Manns Up", they get bonus loot at the end of the mission, and a bigger reward at the end of a tour (set of 3-6 missions, depending on difficulty). These bigger rewards started expensive, but slowly dropped. The only one of any value besides the Pro-Killstreak and Austrailium items (better ones are valued like Unusuals, while lower ones are valued at 1-3 keys) is the Golden Frying Pan, which is valued at ridiculous levels.

http://backpack.tf/stats/Strange/Golden%20Frying%20Pan/Tradable/Craftable

A big part in trading is the Steam Market, which allows users to sell their items (only certain types) for real world money (that is still stuck in the Steam System). Users can also spend their money on items in a similar fashion. This is all user to user, much like trading.

That is a basic overview of the how the TF2 Economy works and how it is regulated. Outside of the Mann Co store, have little say in the economy. Its community is what creates the prices. Backpack TF probably creates the guide lines off of supply and demand, but because of how easily both can change, that might not be the only factor to the prices. I want to explain more of why things are priced the way they are, but I don't know the inner-workings of Backpack TF.

Answer 1

TL;DR: I think the most probable reason is a (close to) constant supply of everything and that the demand for everything is declining but we have a slower decline in demand for keys.

Lets start with the supply side first:

Most items (as I understood) are created by playing the game. So when you play you generate these items and as people are (obviously) playing this game they are created and we have a supply. Assuming that there is no significant change in the games that are played, we get a constant supply of "most items" (i.e., weapons, metals) $s_n$.

Keys however, are bought by players. I am assuming that players will also buy a constant amount of keys $s_k$ (which is probably not true, but I will discuss that later).

Now the demand side:

You said metal, guns and stuff like that is either used as as it is or used to create an item. You never said anything about consuming these items, so I guess (is this true?) that, once you have an item you keep it and don't need it anymore. Therefore, if the player base is not increasing fast enough, the demand will decrease at a certain rate $d_n$.

The key are used to generate items of 3 different kinds (I hope I got that right): normal items (like above), hats (which can not be found and are pretty rare) and consumable items (like MvM). Normal items have a change in demand which is $d_n$ (as we defined it like that), hats have a slower decrease in demand, as they are a) more rare (and therefore more people still need them) and b) are randomly created (which means if one wants one specific (but very rare item) one has to open many chests), therefore their decrease in demand is lower $d_h < d_n$. The last item we can get is consumable, so I think it is save to assume that here the demand is also not decreasing that much as they are consumed, i.e. $d_c < d_n$.

Combining demand and supply

So, what do we have? We have seen, that the difference between the change in supply $s_n$ and the change in demand $d_n$ of normal goods (lets call it $e_n = s_n - d_n$) is negative, so there if there would have been a (real and fixed) currency in this universe, the price would be dropping.

What about keys? Here we also have that the difference is decreasing, but at a much slower rate (as $e_k = s_k - d_k < s_k - d_n = s_n-d_n$). Therefore the relative price of keys, compared to the price of normal goods should be increasing.

Why has it just started now?

There could me many reasons for that, some of them could be:

• not enough new players (many old players have most of the normal things and therefore only need keys)
• not enough old players are leaving (pretty much the same as with not enough new players)
• we have a higher normal item drop rate that we are used to (maybe due to
• MvMs or something like that?) they added new normal items before that on a regular basis and now slowed down / stopped
• ...

Could one change this?

Sure, just check every possible demand and supply effect, you could for example buy many normal items (increases $d_n$), sell many keys (increases $s_k$), many people could ignore keys (decreases $d_k$) or don't sell normal items any more (decreases $s_n$). Another way to change the price in the right direction could be to get a constant stream of new players, which grows larger and larger over time or get enough old players to stop playing.

As an economist, I actually see no point in doing that, the market seems to be working like it should. If the designers want to change this, they could do that pretty easily, e.g. by adding new normal items, increasing prices of the keys, add great and expensive consumable items that use up normal items, randomly destroying normal items or just decreasing the normal item drop rate.

Remarks:

Constant amount of keys: We don't really need a constant amount of keys bought, but that the supply of keys is not increasing much faster than the supply of normal items, so the assumption is not as bad as it sounds.

Other reasons? There are probably other possible explanations, but this one seems, at least to me, the most likely.

Some additional remarks, not really related to your question:

You might be thinking," If it is a barter system, why do prices exist?" The price part, comes from a community of people. This site, called Backpack TF is one of the (if not) biggest sites that give item value guide lines.

This is actually not surprising to an economist, in the end every market is is some kind of "barter system".

When a new [crate] is released, it can have a high initial value, that decays with time.

This is also expected, as the demand is pretty high from the start but the supply is (pretty much) constant over time.