Land Baronry - Rights, Wrongs, and a Surprising Conclusion

I just prepared a post so long, I'm giving you a warning/summary first.

I define land baronry as trading in land without doing anything to it. No development, no renting. Just buying and selling. Maybe that's the wrong definition, but it's the one I'm using here.

I decided to have a close look at such land baronry, to see what was bad or good about it, if it looked remunerative, and if the widespread complaints of greed and parasitism are fair.

I am a bit astonished at where this lead me, and would like to see if someone can point out where I am wrong.

My surprised conclusion is that almost all that they do is of some value to the rest of us. That we maybe complain at their margins partly because we don't understand how ridiculously high their tier costs are in holding land even briefly, or understand the effort they need to prevent these costs going even higher.

And that making money by speculating on overall changes in land values is almost impossible.

That the one thing they do that is close to parasitism is simply taking advantage of our own ignorance and laziness of what the "right price" is, which is just part of life.

That the argument for stabilising land prices (and I think it is very strong for unrelated reasons) is not that it would prevent land speculation. Speculating on overall land price changes is impossible unless land prices are increasing by 30% per month - almost unheard of, and anyway could never be relied upon over any time scale.

Note that I am NOT saying they don't ever charge too much for their "services". Just that they nearly all are "services", and we probably underestimate their costs.

The next one is the detail of the logic, and is ridiculously big. Don't blame me if you insist on reading it.

Here goes Ellie again :

Lets see if we can break the margin a land trader can make into its component parts, and identify the different things he can get up to :

1. "breaking bulk" ie buying in pieces bigger than ordinary people can afford, and cutting it up into the sort of size they require. Maybe changing a drawn-out, uncertain auction process into an instant, fixed-price, "click".
2. "superior knowledge" ie trading cleverly, by taking advantage of other players whose knowledge of what the stuff is worth right now is imperfect. Distinguish carefully from (3). This one (2) will still work if the land is resold instantly, so that no advantage is taken of an actual price change.
3. "normal speculative activity", can be alternatively be described as "invest and hold". This is the one in which the margin cannot be got by an instant resale, but relies on waiting for the price to increase before selling. To consistently succeed, the market must move significantly, and must be successfully predicted.
4. "manipulative speculative activity", in which traders with significant market power, or with other power to influence market confidence, improve their performance in (3) by giving false or misleading indications and/or making trading gestures, so that their knowledge that the resulting movement is temporary or contrived allows them to profit. Difficult, dangerous and open to very few.
5. "Development". Improve the land so that it is worth more, eg by adding infrastructure etc.
6. "Sales Broking". Holding a portfolio of land always on offer to buyers, with a good variety of types, and providing the buyer (perhaps in a hurry) with information on its features, to help in her choice.
7. "Purchase broking". Buying land from a seller in a hurry, eliminating the need to wait, albeit at a "fire sale" price.


Lets forget (5) as a different activity, and (4) as unlikely to happen in SL, though not impossible. Which of the others are useful to other players? Of those which are not, which are in a sense parasitic, which can be prevented/reduced, and how?

(1) can be a useful service, given that SL do not want to do it. The trader does something SL cannot be bothered to do, saving them employee effort. So it is probably useful. This one seems to cause a lot of the resentment, but the fact that it happens is the fault/choice of LL, or (in the past) ordinary people's reluctance to involve in auctions.

(7) can be a godsend, and we can be very grateful, even to sell a bit cheaply, if it is exactly when we need it.

(6) is probably not very significant, but may be useful to some people occasionally. Particularly since land is not a uniform commodity, and different types have differing desirability, and therefore different values, so someone who understands it, if they only take a reasonable profit from you, may protect you from a more serious mistake.

That leaves (2) and (3) as potentially parasitic.

(2) may seem heartless, but someone is going to take advantage of those unable or unwilling to research the price carefully, and not much can be done about it. Stabilising land prices would reduce it a bit, by making price more certain, but people would still be confused by the different land locations and types, and anyway, the idea of an exact "correct price" for a particular parcel is partly a fiction.

So the only candidate for a really parasitic activity which is going on here in significant amounts is (3). This is "normal speculative activity". Making money from genuine overall movements in the market as a whole over time, but buying when it is low, and selling when it is high.

Lets look at this to see how attractive it is. Whether we fancy having a go at it.

It involves owning land, and waiting for the predicted price change. Since you have to be free to sell at the right moment, unless you are relying on long term changes (more than say two months) it would seem you have to leave the land empty, and can't really rent it out while you hold it.

So what is the cost of holding empty land. Frighteningly high. In addition to the RL interest costs of tying up money you could have in real RL dollars, you have tier to pay.

Even for the big holder, I dont think you can get the tier below roughly US$200 per US$1000 of land. Which is 20% PER MONTH. Aaaagh !

But wait ! Its much worse than that, and more fraught. Because of the tier boundaries.
(a) You only have to be over a tier boundary for one second, and you incur the extra tier as if it were the whole month.
(b) You only have to be over a tier boundary by one square meter, and you pay for the whole next chunk you do not have.

So if you don't perfectly fill your entire tier, for the entire month, you are paying at a much, much higher rate. Even fill 3/4 of your tier, for 3/4 of the month, and you may be paying at close to 40%. Its a very complex calculation.

I think we can assume a trader who is doing many trades per month (buys when price is low, sells when price is high) and who is trading in chunks of significant size relative to his tier level. He will be unable to keep himself consistently just below a tier level, because he cannot always choose the precise timing and size of every trade.

What this means is that his average tier charge will be well above the 20% per month. We might guess that if he exerts no "tier efficiency" control at all, he might suffer from (a) and (b) to the extent that on average he is paying 40% per month.

What this means is that unless the land you bought is appreciating by more than 30% per month, you are losing out, and even to get that you have to be very sharp in controlling the timing and size of your trades to keep your tier fullish and yet within limit.

I'm too lazy to examine the land sales curve, and correct it for exchange rate. My guess is it that 30% per month has almost never happened, and could certainly never be relied upon occurring in the future.

My conclusion is that it is almost impossible to make money by speculating on land price changes with time. Holding land empty for this particular purpose is close to insanity.

There is money to be made in land, but it is for legitimate purposes which give some value to the community, as listed above.

Which is not to say we are not being ripped off, of course, if the margins being taken from those useful activities are too high.

But I don't think many of us realise that anyone with empty land, and trading around with it, is likely losing at least 30% of its value every month it is held.

Not realising this may mean that we are unable to fairly assess when we are in fact being ripped off. Holding land for resale at a profit without another use for it meanwhile looks like a very dangerous game, requiring a continuous tier balancing act, and a very fast turnover.

Why aren't certain people bankrupt ?

I'd be glad if someone can show me an error in my logic. I didn't really know where this would lead me, and am pretty surprised by my own conclusions.

Having recently read Freakonomics : A Rogue Economist Explores the Hidden Side of Everything by Levitt and Dubner has cast new insight on the issue for me as well. The book is a bit of a hodge-podge but does bring some interesting, quantifiable analyses to various economic interactions.

First a couple of premises drawn from Econ101. Every capitalistic endeavor needs to bring benefit to its proprietor - that is, produce returns in excess of investment - or it is by definition philantrophy and not a business. This plays out in a number of ways in everyday life: for example, your employer will always pay you less than you generate for them otherwise they should fire you and stick that money into some bonds or such. Similarly, a grocer will charge you more than their direct costs for an item (typically on the order of 3%) for much the same reason. Neither of these things are necessarily bad and result from division of labor that was most clearly articluated by Adam Smith in 1776. Put simply, the grocer uses his specialization in the acquisition of groceries to provide a convenience to you that you are willing to pay for; put another way, you'd likely not be able to obtain your own groceries for so small a margin.

The example from Freakonomics that is most applicable here is that realtors use (or exploit) the asymmetry of information between you and them to extract additional cash for them. What asymmetry of information does the realtor have over you? They have much greater knowledge of the market, valuations, current demand and supply than you do. This is not wildly different than the grocer knowing better than you how to obtain foodstuffs.

So why can the realtor be called exploitative while the grocer not? Levitt put this question to test in a rather simple and clever way. Do realtors obtain better deals on sales of their own homes than they do of their clients? As real-estate transfers are a matter of public record (in the US at least) this was a rather easy question to answer. Yes, in fact realtor's own homes stay on the market longer than their clients' and they obtain a higher price for them. Levitt makes a much stronger argument than this gloss does.

How does this apply to SL and the preceding analysis? The land brokers in SL have vastly greater knowledge of the market than does the typical land buyer. Moreover, recent changes in LL policies have served to make that disparity greater; not only do the land brokers have greater knowledge, but they also have greater access to land than does a typical player because of the auction-by-entire-sim only policy.

Worse still, as there are very few land brokers, the possibility of affirmative or "accidental" collusion toward price fixing at higher than market price is very real. For those who may doubt actual collusion happens, I know an attorney for the DoJ Anti-trust Division who spent years uncovering price-fixing in fields as unlikely as trash-hauling and bleach production. For an example of "accidental" collusion, ask yourself why you pay a buck or more for a bottle of water given how many suppliers there are and how unlikely it is that they are all sitting in a smoky room somewhere conspiring.

Now let's compare the current situation to how things were before the advent of land brokers. When I started playing, there was land owned by Governor Linden which you could purchase for L$1/m; moreover, you could decide you wanted a change of scenery and actually find plots for sale. When you released your land, you received your purchase price (you did have to pay weekly taxes in L$ which you didn't recoup). Better still, there was considerable land not available for purchase that was released as demand increased. I cannot say that this was better or worse for LL, but it certainly was more buyer friendly.

Finally, if in fact, land held by the brokers is priced higher than market equilibrium - which I think is amply demonstrated by the vast acreage in broker hands - then there is producer surplus that could instead be going to LL's coffers instead of the land brokers. Where this would be undeniably bad for a small pool of brokers, I can't see how this would be but an unqualified good for the commonweal.

Please note that this speaks only to point (2) of Ellie's thesis and is not necessarily a refutation of it, merely another view.

Fascinating insight, Introvert. And I've just been reading your wikipaedia link - didn't know about "producer surplus". Learning all the time.

I suppose we could look at it this way. If each month you hold empty land costs you 25% of your purchase price, in averaged tier, then your selling price to just break even, depending how long you have to hold it, is very crudely as follows (first % column). The second % column is what you need to sell for in order to make 20% profit on what you have paid out to date

1 month 125% 150%
2 months 150% 180%
3 months 175% 210%
4 months 200% 240%
5 months 225% 265%

etc.

If we see a land dealer selling at twice what they paid, maybe it indicates that on average it takes them just over three months to sell a plot. The way the stuff sits about all over the place, I wouldn't be at all surprised if it was currently even longer.

And of course, they are in a dodgy position of possible runaway loss. If their average price gets less competitive, it takes them longer to sell, so they need to sell higher, get even less competitive, etc etc, until they sell none, and they're into big losses when eventually they must.

I wouldn't touch it with a barge pole.

But why on earth are they buying more ? I know it is currently cheap, and they might think they are reducing the average buying price of their stock, but that is logically a very faulty viewpoint. Or maybe it isn't. I need to think about it. Makes ones brain hurt.

I also agree it's too risky, unless you have a very high market share.

This is where I'm lost, Hiro. Unless there is a secret after-auction multi-sim purchase discount, or a multi-sim tier discount (both of which I believe not to exist), then where are the economies of scale once you get above one sim ? If you are rich you can buy more of them, but how does that help you make more per sim ?

I'd really like a bit of help to understand this. Have I just got a blind spot ?

Either I have figured out how Linden Lab is forfeiting major revenue to landlords or I've made a collosal mistake. I'm waiting on someone more skilled in accountancy to tell me which.

That's the easy part.
Assume I'm the so caled land baron. I can only make a profit if people actually buy the land I invest in... and yes, owning the sort of tier Anshe does IS an investment... whether or not I agree with how she does business... she does it well.
So basically, in that position I want people to buy from me. And the best way to do that is to own all the desirable land for sale. If I own it, they HAVE TO buy from me... That way, I can control the market, up or down... If Anshe wants to be nice and charge L$2/metre, everyone else has to follow, or they won't sell.. if she charges L$20/metre, same, cos most of the land is hers...

It's basic economics.

As someone who is on a tier of over 20 sims, I can assure you there is no discount past the 1 sim tier level. At least, if there is, it hasn't come my way lol.

As Siobhan pointed out, if you have a large market share, you have a large influence on the market as a whole. Have a large enough market share, and you can pretty much control it.

Wow, great analysis Ellie. I enjoyed it. I think you have a gift for seeing the big picture of things.

Hiro and Siobhan have the essence of it. Owning the majority of resources in a market segment enables you to control the pricing of that segment. Anyone who played WoW for any length of time learned this quickly. Many players, including myself, make a killing on the Auction House by finding production niches to own. You would simply buy all auctions in the space you wanted to sell, then repost them as your own, setting the price you wanted. If anybody underbid you, you just bought their items and held them in reserve.

I positively owned certain segments of the alchemy market this way, and earned enough to pay for my first mount at level 40.

Same exact principle apply here. If a few people own all the available land, they can easily collude to set the land prices. The rest of us are powerless to stop them from doing so.

This is the outcome of unbridled capitalism. Those who try to brainwash the public that capitalism and trickle-down economics are good thing are merely sharks who are raking in the cash.

Capitalism *is* in fact very useful, but it has to be limited and guided by government oversight to prevent exploits that hurt the commonweal.

I'm going to use Anshe as an example, since you are bringing her name up.

Okay, from an experiment anyone can do you can see Ansche does not own most of the scarce land. It is true that there is certain land that is more scarce. Land directly next to a telehub is more scarce. Land on the waterfront but above ground is more scarce. Commercial land directly next to a popular place is more scarce. Ansche does not own every peice of these lands. Go to telehubs and see if Anshe owns every peice of land around every telehub. Go to waterfronts, does Anshe own every peice of land by the water. Go to popular places, does Anshe own every peice of land by the popular place. The answer is no, which means she does not have a monopoly. Even if these peices are not for sale today, they will be for sale someday. The scarcer the land, the less time it spends for sale on the market no matter who owns it. People are more likely to put a peice of land next to a telehub to use than they are to put a peice of land 1000 meters from a telehub to use. Some may want the farther land, but the fact is that a majority prefer land near the telehub.

Anshe therefore has competition. If she was nice and sold all land at L$2/meter2. Hundreds of people would jump on the land, and it would be resold within a matter of days for a higher price. If Ansche sold all land at L$20/meter2, she will find that she has a huge teir fee with no sales. There are plenty of land owners out there willing to sell to you for less than L$20/meter2.

More than others does not automatically mean control of price. Unless a seller has a great advantage over competition they will not control the price. Having more than others is not the same advantage as having most of the land in existance. Ansche is far from even owning half of all SL. What does she own, 30 sims? Isn't SL bigger than 60 sims? Anshe is big. Anshe is diversified, and Anshe is successful as far as I can tell. That does not mean Anshe is the one that dictates the price of things in SL.

Dark Kovin is absolutely right. There are two things that prevent people in SL to create anything even close to land market monopoly:

1. Tier costs
2. Unlimited land supply

Because of tier cost you can not afford to own more than one tiny percentage of the grid. I am holding about 30 sims worth of land on mainland. That sounds much, but it is less than 3%.

Unlimited supply of new sims for 1000$ each ensure that land price will never ever climb much again. As soon as land prices would go up even, say, 20%, people would start buying new sims from Linden Lab and sell them in world.

So there isn't much that land barons can control in SL and there also isn't much to win with speculation. On main grid it all comes down to who provides better service, has better marketing, the best pricing know-how and who is the most effective parcel monkey.

I tend to agree with you, Dark. While I think carefully about Hiro's and Siobhan's thesis that a big really big player can control prices, I really dont see that we are there yet. She can of course push the price DOWN any time, but can she keep it up ? As long as there is a sufficiently healthy number of residents offering their own land for sale, and having to drop price until it is sold because they cannot wait indefinitely, surely this cannot be true other than slightly ? Provided we can find these plots and offer on them or buy them, she cannot stop the market working.

It must be true that if such a player is really "hoarding" land, deliberately unsold in violation of a natural trend, she can reduce the supply to some extent and so create an artificial scarcity. But I see no scarcity of non-Anshe land to buy. She isn't big enough for that yet. And though such hoarding will have some effect, it is very quickly self defeating is it not ? Because of the massive 30% or so deterioration in its competitiveness every month it is hoarded (the tier). It is decaying almost as fast as bread.

I am uneasy relying on word-logic here. I feel the need of some equations, and am sure economists have them for this situation, and could quantify what threshold a monopoly must reach before it gains real power. But my instinct is that Anshe is way below the necessary level yet. Though I can't prove it, and I may be wrong.

For one thing, the price of land isn't rising, or holding up. It has been falling for some considerable time, and the big holders of empty land must be currently facing substantial losses, further compounded by the exchange rate fall. If you are a big holder in control, why would you let that happen ?

Never forget, empty land decays by about 30% of auction purchase price per month. That's HUGE.

All that rings absolutely true to me Anshe, and fits well with the conclusions of my analysis at thread start. Right down to my conclusion that straight speculation can't work.
Your post came in while I was replying to Dark.
Reassuring.

This topic is raising its head again, as a factor supporting the land barons in seizing the role of land sale intermediary.

At first I was highly incensed about this, believing as do some here that this was a significant loss of opportunity to the non-baron, contributing to exploitation and a price hike.

But Philip answered the outcry by posting statistics on how many little people had actually chosen to participate in the auctions in the previous three months. Not win. Just participate. The number was tiny. It shut me up - for people who wanted it so badly, we simply did not use it enough.

And remember, in the same move, LL effectively capped the sim price at close to US$1000. A little variability for higher quality ones, but you can have a bog-standard one for exactly US$1000 any time you want. An unheard-of reduction. Previously they regularly went to U$1400, U$1600, occasionally up near U$2000.

And no land baron can stop you getting one at U$1000, because there is now an umlimited supply.

LL have made it clear that they have chosen to off-load the effort required in subdividing land onto third parties, thus saving themselves money. You could regard part of the barons margin as a wage from LL for providing them, not us, with this service.

So LL have already responded to our objections to land barons exploitation. They have capped the price, made it impossible for them to squeeze any other buyer out, and the prices in-world really have dropped as a result. The only thing they have taken from us is something we simply did not use enough for them to bother with the effort of supplying it.

The one big issue remaining in baronry is the level of tier discount. And thats a difficult one which can be viewed two ways, and it is. In several other threads.

Though the two issues do interact, don't they ? If whole-sim tier goes up, the baron's costs in holding the land in stock, and associated risks, will go higher, and he will need a higher margin still. Tricky.

Okay, there is something else going on in the background as well. Linden Labs is also in the land sale business. They want their new sims to sell. By puting the price cap on sims, they are banking more on growth and volume rather than just price. With cheaper auction sales they may possibly see more growth of higher paying customers who can suddenly afford a non-island peice of land for much cheaper. Their sale is desperately dependant on the demand for land though. If land suddenly goes down in value, because big land owners can't afford their land costs and must sell, they will see a decrease in demand for a newly overpriced $1000/sim peice of land. They will have to look at the numbers and decide how the fees should be best distributed to get the most demand for land. If they flatten the fee discounts too much or abolish it they will lose money from too little people wanting land at the top of the fee structure. If they steepen it too much, they risk the little guy brunting too much of the burden and they could lessen demand on the lower side of land fees. Linden Labs has to be careful with this for their own good, not neccisarily just for the good of land barons.

It is true that Land renters would suddenly be in dire straights the more and more the discounts were flattened, but land sellers may not be effected as much. You have to remember that a land seller makes money off of a change positive or negative more than they do off of a mark up. For a land seller to survive they have to constantly sell all the land they own in a timely fashion so that they will have new land at the same teir cost in the same month to sell. If I sell $L100,000 worth of land in a few days, and then the next week am able to buy the same amount of land for $L80,000, I still have made money. I have land that will still sell at a small percent higher for a day or two, and I have $L20,000 I don't have to reinvest back into land. The only two times you lose money is if you buy land that is too expensive to sell before prices drop too much, or until your teir fees come in and you don't have enough profit. People learn about the change in prices slow enough though, that lowring prices aren't always keeping a land seller from selling for more than they bought at. That is why there is speculation, because land sale is like day trading.

Okay, there is something else going on in the background as well. Linden Labs is also in the land sale business. They want their new sims to sell. By puting the unlimited supply on sims, they are banking more on growth and volume rather than just price. With cheaper auction sales they may possibly see more growth of higher paying customers who can suddenly afford a non-island peice of land for much cheaper. Their sale is desperately dependant on the demand for land though. If land suddenly goes down in value, because big land owners can't afford their land costs and must sell, they will see a decrease in demand for a newly overpriced $1000/sim peice of land. They will have to look at the numbers and decide how the fees should be best distributed to get the most demand for land. If they flatten the fee discounts too much or abolish it they will lose money from too little people wanting land at the top of the fee structure. If they steepen it too much, they risk the little guy brunting too much of the burden and they could lessen demand on the lower side of land fees. Linden Labs has to be careful with this for their own good, not neccisarily just for the good of land barons.

It is true that Land renters would suddenly be in dire straights the more and more the discounts were flattened, but land sellers may not be effected as much. It will be a riskier venture, but it may not be as big an effect as land renters that require heavily on discounts to have something to offer. You have to remember that a land seller makes money off of a change positive or negative more than they do off of a mark up. For a land seller to survive they have to constantly sell all the land they own in a timely fashion so that they will have new land at the same teir cost in the same month to sell. If I sell $L100,000 worth of land in a few days, and then the next week am able to buy the same amount of land for $L80,000, I still have made money. I have land that will still sell at a small percent higher for a day or two, and I have $L20,000 I don't have to reinvest back into land right now. Now you may correctly say that I haven't made $L20,000, because I put say $L90,000 into the land that sold, but now say the land swings back up to $L85,000 in worth. That would of been a $L5000 loss that instead acts as a extra income, because I changed prices at the right time. The more ups and downs there are, the more chance for profit. What goes down will come up at least some, what goes up will come down at least some. The more outside things raise and lower the price, the more ups and downs the market will see before it starts to stabilize. The more ups and downs there are, the more chances there are to out maneuver the competition. It is all as risky as day trading, but it is a market full of non-traders that adjust slowly enough to allow people like me to find profits no matter what the market does.

This is why an unstable economy is good for people like me, but bad for everyone else. I still hope LL does things to stabilize the economy however, and you are right that making the wrong choice on discounts would be something that would hurt the value of land and the profit of land renters and sellers.