Monday, August 12, 2013

Guest Blog: Opportunity Cost

"Calculating people are contemptible  The reason for this is that calculation deals with loss and gain, and the loss and gain mind never stops. Death is considered loss and life is considered gain. Thus, death is something that such a person does not care for, and he is contemptible.

     Furthermore, scholars and their like are men who with wit and speech hide their own true cowardice and greed. People often misjudge this."

-Yamamoto Tsunetomo, Hagakure

Hello, I'm That Bitter Bastard who managed to piss off the Pirate Queen, Sugar Kyle, in a rather heated discussion over what amounted to quantifying opportunity cost.  She has graciously offered me the opportunity to guest post here on her blog.
The main point we disagreed on is that I suggested rolling in transportation costs at Black Frog Freight rates into the price of goods.
Now, to clarify where I'm coming from:  I do not run a lowsec store catering to all the needs of the local residents.  I have lived in lowsec for most of my eve career on my main, that includes handling my own logistics for ships and fittings.
Opportunity cost is defined as, "the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources".  It's the basic relationship between scarcity and choice.  Opportunity cost is not simply money/isk, but can also be valued as time, effort, stress, invested assets, and risk.
Eve Online is filled with people who do not value their own time, reasoning that the minerals they mine are free, the time they spend hauling is free.  This leads to the situation of most T1 ships selling below their mineral build cost (pre-patch building to cut out the anticipated extra mineral addition to BPOs notwithstanding).
There is no singular "right" way to value ones own time and effort, but I am of a strong anti-"Minerals I Mine Are Free"/"My Time Is Free" mindset.
Handling logistics for a small handful (12-15) frigates is mildly tedious work with a blockade runner, slightly less so with a deep space transport.  However once the volumes required escalated to multiple destroyers, cruisers and up, the task of logistics rapidly escalated to tedium I was unwilling to endure or even able to fulfill, reduced to flying each ship out manually.
This is where Black Frog Freight (BFF) steps in.  For those unfamiliar, BFF provides transport of goods up to 320k m3 to lowsec for a mild fee of 75m for 1b collateral and so on.  It became trivial to buy up all the necessary ships and fittings, contract it to BFF, and go have fun.
I'm quoting BFF for the reason that they are the biggest public competition for lowsec logistics.  Much like Jita is New Edens price index, BFF sets the "haul lots of stuff to lowsec" effort/assets/risk index.
Given my choices for handling lowsec logistics of:
1). BFF the goods in, thus outsourcing the risk, time and needed assets (Jump Freighter) for the volume at x isk/trip.
2). Do it myself, assuming the risk, time and needed assets (blockade runner or deep space transport).
The x isk/trip is my opportunity cost if I do it myself, essentially I'm paying myself the transportation costs.  This is counter intuitive.  Not accounting for opportunity cost is to value ones own time, effort and risked assets at zero.
To put it another way, lets say I haul 20 Rifters out to a lowsec system and put then up for sale at 1m each, a mark up of ~0.5m from the nearest trade hub.  From that 0.5m per hull is the amount that I'm paying myself for the time, effort and risk I took to get those ships into position.  For a FW participant who lives deep in the warzone that might be an acceptable premium compared to his or hers other options.
What might this look like for say, cruisers?  Cruisers have a volume of 10k m3 packaged.  BFF has transportation volume of 320k m3 for 75m isk.  So I'd be able to contract 32 cruisers and have an added cost of ~2.35m per hull if I intended to resell.
Battleships?  50k m3 each works out to be 12.5m per hull.
And so on.
This choice was apparent when I was in Faction Warfare.  I could either spend a couple hours hauling my own stuff in or I could run a couple L4 missions and be done in one hour to pay someone else to haul of it in.  That is opportunity cost in a "Eve is Real" example.
How does this compare to buying a Jump Freighter for hauling?  Assuming the cost of a Jump Freighter is 6.3b (not factoring in the cost of skill books, training time, and jump fuel), the break even point is 84 jumps.
A brief anecdote to all of the above:  When I started T2 manufacturing, I had a small POS, 20 manufacturing slots, 30 science slots and a small collection of blueprints.  Not much.  I converted FW LP into datacores for my own use and hauled most of the rare and expensive materials from Jita to Heimatar (yes, I had my own little bout of "LP I farmed are free" moment).
Eventually I gained another account and a few more manufacturing and science slots and the sheer volume of stuff I needed outgrew my patience for hauling.  So I outsourced to Push X and Red Frog Freight who could haul in a great deal more volume and take on the risk inherent in high value transport.
The cost of transportation added in a small amount of overhead that could not be incorporated into sale price.  
Now, part of my opportunity cost in manufacturing goods and opposed to inter-regional trade is the goods in Rens tended to have increased margin over Jita prices thus the transportation cost was already covered by selling locally.
How about from the consumers point of view? Some of those choices might be:
1). Does my pirate organization have a logistics wing?  If so then it's likely there will be little to no upfront isk cost.
2). Do I or a corpmate have the skills for a hauler of sufficient quantity and either an alt or a corpmate to scout me in?  Do I have the time and energy to put into the task?
3). I always have BFF available, to a destination of my choice but I'm at their time table for transport.
4). Is there a lowsec trade hub nearby that offers the goods that I want at an acceptable premium and location?
In all 4 examples there's competition between the various resources available and their scarcity (location, time, effort, cost, assets and risk) that each player ultimately must decide which is more important and pay the opportunity cost for their decision.

My thanks to Sugar Kyle for this opportunity and you, the reader, for your time.


  1. You are entirely correct in stating that opportunity cost is a thing and that it exist.
    And I myself operate much the same way.

    As you already mention yourself, people are free to value their time however they want.
    AND they are also free to value it in something other then ISK. It's annoying to for us who value our EVE time in ISK that T1 ships often sell under what we perceive to be their value, but that's really only because it puts us at a competitive disadvantage in certain markets to people who value their time in some other fashion.

    But if somebody derives great personal satisfaction (or some other merit they perceive) from not valuing their time spend in (what is ultimately a video game played for leisure) ISK but in something less quantifiable (to us) who am I to tell them that's wrong or less valid?

  2. I'd never argue against opportunity cost, your post is good from both an EVE perspective and a base economic level. However, I believe you run into problems when you try to apply it to a pastime such as gaming. Even in real life, you have to be careful what you're applying it to.

    Sure, a large corporation - accountable to shareholders - must definitely play by the rules you outline; but think to the village shop keeper perfectly happy to "just get by" in exchange for helping the community to prosper.

    You can't argue your own logic with someone playing a different game & the beauty of a sandbox game is that you get to define your own game.

    My Game (for now!) is bubble camping in 0.0. I park my ass in a busy system, prone to blobs and I usually lose 1-2 bubbles per night. People tell me I should change My Game. I'm dumb for camping there. I should hunt FW, I should join a large alliance, I should fly a different ship.

    As long as I'm happy; I'm achieving my goals; I shouldn't think it matters.

  3. Say I wanted to acquire a ship. I can use the proceeds from missions, PLEX sales, wormholes, incursions, exploration, faction warfare, or what have you, and buy one right away. Or I can mine the minerals and build it myself.

    Now if my goal is to maximize the potential number of ships acquirable over time, or to minimize the amount of effort I need to put into acquiring a ship, then the ISK earning methods would likely prove superior to mining the minerals and building the ship myself. But if my goal is to pay out the least amount of ISK for a ship regardless of how much ISK I could have earned from elsewhere in the meantime, then building it myself is clearly the superior method. Yes, "pay out the least amount of ISK for a ship" is an arbitrary goal. But within that arbitrariness the goal is non negotiable. And if I happen the derive the greatest sense of satisfaction from fulfilling that goal, then I will mine my own minerals and build my own ship every single time.

    The same applies to stocking a lowsec market. If the goal is to stock a distant region in the most efficient way possible, then contracting out the shipping for a fee is the way to go about it. But if the goal is to stock a distant regional market at hub + x prices, then so long as BFF shipping fees exceed x, no amount of arguing over opportunity cost will change the fact that using BFF will cause prices to rise above hub + x. Increasing the markup percentage is simply not an option when that percentage is already set in stone.

    Faced with unacceptably high shipping fees, the only options are to either mitigate or to subsidize. If Sugar happens to derive more satisfaction from mitigating shipping costs with her time than subsidizing shipping costs with her ISK, then she's running her market exactly the way it ought to be run. Implying she's doing it wrong makes no more sense than implying an efficiency driven marketeer is doing it wrong because she should be enjoying the hauler piloting and construction aspect of the game more than her efforts to minimize opportunity cost.

  4. As a manufacturer and trader, moving stock can be the only tense part of your time, particularly with lowsec. Provided self hauling is not holding you back/too risky id always advise it, keeps the heart rate going more tha queueing jobs. And freighting costs need to be favtored into profit costs for sure.

  5. I am probably in the minority in saying that I operate off of what I tend to classify as "true ISK cost" This is the actual amount of ISK I have invested in a particular product. If I mined the common minerals and bought nocxium, zydrine, and megacyte then my true cost on that particular module ect is what I paid for those 3 minerals. If I sell that product for more than that then I made a profit. I do not HAVE to go by what the minerals are selling for I do not have to sell my minerals I can "cash in" my time however I may want because I am going to play the game anyway :) This often allows me to undercut other manufacturers who buy all of their minerals ect because they have a higher "true ISK" cost in their product than I do. I do not see one way as "right" and the other as "wrong" I just see people playing the game differently but I will say that I do not have time for high and mighty economist telling anyone that they are playing the game "wrong". That is the beauty of this game we can choose our own way of playing it and if I am explaining my personal philosophy to a newer industrialist then I do try to explain multiple viewpoints (including the minerals you mine are not free viewpoint) so that they can also choose to play their own game and be secure in that game no matter what other people may tell them esp. if they are told they are playing the game "wrong". :) I have always ferociously defended the position that an individual can put any price on their time. That is the freedom of EVE.