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Bubble, Bubble, Bleiweiss, and Trouble

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Update: Please be sure to read the comments for further discussion on this topic by a number of individuals including Ben Bleiweiss himself.

If you haven't been living under a rock for the past month, you undoubtedly know that something is rotten in the Legacy format. Over the past three to four weeks, the prices of Legacy staples have gone through the roof, with many cards gaining anywhere between 20% and 80% in value. What happened to cause this increase? The chain of events is fairly straightforward, though the reasons for full market repercussions might be a bit more obscure. Approximately four weeks ago, and then again two weeks ago, Star City Games announced a sizeable increase in their buy-list prices, and corresponding sale prices, for eternal format staples. Almost immediately, every relevant MtG retailer had followed suit, as had sale prices on eBay.

I want to discuss some of the causes for this price change, but before I do, here is a sampling of cards that changed radically over the past month, to make sure everyone is up to speed. Because of SCG's apparently forcing the change, the prices quoted are SCG sale prices. Prices from a month ago are approximate, based on my memory, because SCG doesn't provide historical pricing data.

Card Name Rarity February
Price ($)
April
Price ($)
$ Change
(+)
% Change
(+)
Plateau R 30 50 20 66.7
Badlands R 35 60 25 71.4
Bayou R 45 75 30 66.7
Taiga R 45 80 35 77.8
Savannah R 40 60 20 50.0
Scrubland R 35 60 25 71.4
Volcanic Island R 55 80 25 45.5
Tundra R 70 90 20 28.6
Tropical Island R 70 100 30 42.9
Underground Sea R 90 120 30 33.3
Force of Will U 55 75 25 36.4
Wasteland U 35 60 30 71.4
Rishadan Port R 25 40 15 60.0
AEther Vial U 15 20 8 33.3
Sensei's Divining Top U 9 15 6 66.7
Tarmogoyf R 55 70 15 27.3
Goblin Lackey U 10 15 5 50.0
Goblin Piledriver R 15 20 5 33.3
Show and Tell R 25 30 5 20.0
Vindicate R 20 30 10 50.0
Stifle R 12 18 6 50.0


As you can see from the above chart, something is rotten in the state of Legacy. But what is it, and why? While there is a general consensus—easily justifiable from the timeline of when these price jumps occurred—that Star City Games had something to do with the pricing increase, views are mixed as to why it spread so rapidly throughout the market. Jonathan Medina [Editors Note: Jonathan clarifies his position in the comments.]has cited the increase in buy-list prices as the core reason why all other retailers followed SCG pricing. After all, if I can sell my cards to SCG for the same price that a local dealer is selling them, why wouldn't I? The simple act of changing this buy price forces all other stores to adjust, or else lose business to SCG cornering the market on Legacy staples. Chas Andres concurs with Medina's assessment, suggesting

The format has exploded in popularity, mostly due to a massive amateur tournament (the StarCityGames Open) being available every week courtesy of a large online retailer. That same retailer, hoping to capitalize on the fact that the format keeps growing in popularity, has decided to exploit the fact that so few of those older cards are still available by singlehandedly moving the price point on them.

The suggestion seems to be that, because Star City Games is the retailer behind the tournament series driving the spike in Legacy's popularity, for some reason they are also able to set the price. After all, isn't Star City Games the largest retailer for MtG around? Actually, no they aren't. Interestingly, I've heard from some dealers that Troll and Toad actually does substantially more online sales volume than SCG does. Furthermore, even though SCG is the biggest retailer (my dealer associates are misinformed), it isn't as if there aren't other retailers that also have cash to spare, and a substantial market presence (CoolStuffInc, ChannelFireball, Troll and Toad, etc.).

Thus, if the argument is that SCG commands a quasi-monopolistic presence over the eternal market, in the sense that it is the only retailer financially able to spike its buy prices sufficiently to corner the market on eternal staples, and thus drive prices through the roof—well, the answer is no. Because of eBay and other important online retailers, as well as some important brick-and-mortar stores (Jupiter Games, in Vestal, New York, comes to mind as far as eternal staples are concerned), there is simply no way SCG commands the market presence to execute such a plan, despite the SCG Open series.

Nevertheless, despite the lack of an overt monopoly, it seems to be that with eternal prices, where SCG leads, others will follow. This suggests that the problem, or the reason for the increase, can't simply be pent-up demand from the rise in Legacy's popularity. If the answer was simply a demand increase, we would have expected a long, slow increase in the value of staples, as retailers gradually adjusted their margins upward. In fact, we did see some of that. A year ago, for example, Wasteland was priced at $25 and Force of Will at $45. In February, their respective prices were $35 and $55. This is exactly the type of slow price creep we would expect to see from a gradual increase in demand for a fixed supply of a good.

So, if it isn't an overt monopoly, and it isn't simple pent-up demand, then what is the actual problem? The core issue is, as with most problems in speculative markets, one of information and human behavior. In particular, Star City Games can be seen as a price-maker (rather than price-taker) simply by virtue of its (supposedly) privileged ability to observe trends in Legacy. This is the issue with human behavior: Because SCG runs the SCG Open, there is a widespread belief among the Magic-playing community that SCG possesses the ability to figure out what the saleable price of a card is, because their tournament is where the card first acquired new value, driven by a prominent high-placed finish.

In some cases, this assumption is correct. The most obvious recent example would be the spike in the price of Candelabra of Tawnos, which went from $30 to $60, and then spiked to $200 (briefly $250) overnight. The card 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.

However, the case of Candelabra of Tawnos is manifestly different from the current change in the prices of eternal staples. There wasn't any new "tech" or any radical increase in the overall demand for Legacy cards that occurred specifically over the last four weeks. Furthermore, Star City Games and other retailers had regularly been nudging the prices of their eternal staples upward, in order to adjust for the persistent increase in demand for these cards. They were not suddenly lacking stock of the cards for which they increased their prices—at least, not any more than is typically expected for relatively hard-to-acquire cards. There simply wasn't a sudden, marked shift in the Legacy market to justify the sudden shift in card prices.

Instead, what we have here is a case of naked speculation, aimed at inflating the price of an entire format, by a market actor that most believe has the wherewithal to execute such a price change. It is this belief, backed up by a robust cash flow, that enables SCG to execute its plan. Given this belief, all the other major retailers follow suit when SCG changes its prices, at least in Legacy.

In the study of financial crises, this is referred to as herd behavior. The phenomenon is similar to the case of net-decking that Patrick Chapin regularly rails against. When a market leader—for instance, a professional Magic player like LSV, PVDDR, Brad Nelson, Brian Kibler, or Chapin himself—announces the existence of a new deck and posts a reasonable Top 8 finish with the deck, other Magic players bandwagon onto the new deck list, and it becomes popular overnight. In a more real-life scenario, similar changes often occur at the onset of a financial crisis. In 1997, for example, the collective economies of Thailand, Korea, Indonesia, and Malaysia collapsed, simply because George Soros (a leading hedge-fund manager) announced that he was abandoning his investments in Thailand and betting against the Thai currency (the bhat). Overnight, every other hedge fund and mutual fund investing in East Asia suddenly followed suit, and plunged previously prosperous East Asian economies into a prolonged economic depression.

What we have here is the same. A major market actor has declared that it will invest in a particular format and puts its money where its mouth is, increasing both its buy and sell prices on nearly all the major format staples. Correspondingly, every other market actor follows suit, and the overall market price changes overnight, despite an apparent lack of real change in market conditions. This is, ironically, exactly the same phenomenon as that which occurred in the real estate market during the run-up to the housing crisis of 2008 and 2009. Major market voices published books expressing their faith that housing prices simply could not drop, and for the next half of a decade, prices skyrocketed above any predictable market trend, only to come crashing down with the collapse of the financial industry in 2008 (due to the collapse of the mortgage-backed securities market).

We can predict, potentially, a similar fate in the Legacy market. For the next year, or perhaps few years, expect Star City Games to lead the way, increasing prices for as long as the market will handle them. Eventually, however, the imbalance will manifest itself with players suddenly unable to afford to enter the format, and one of two things will happen. One possibility is that people will be priced out of the format, and Legacy tournaments will be forced to allow proxies, and potentially go the way of Vintage. Another is that the DCI and Wizards will take action, either by announcing the creation of Overextended as a sanctioned format, or through some type of action with the Reserved List (less likely), or through some as-yet-undetermined means. Chas Andres is correct to suggest that this won't occur in the immediate future, but if these trends continue indefinitely, simple economics will force the DCI's (and WotC's) hand.

Still, enjoy the bubble while it lasts, because there's a lot of money to be made. Just don't be surprised when the house of cards comes crashing down.

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