How to prevent crafting costs and selling prices to converge in economies?

Question

There is a pattern in player driven economies, where the production (or crafting) costs and the selling prices of items converge to a point where the profit margin becomes minuscule or even negative. Examples which come to mind are World of Warcraft and Eve Online, but I am sure you may recognize this pattern in other games (primarily MMOs) as well.

A simple example:
Reagent costs for a health potion is 1.0 gold in total.
Crafting process requires only some seconds.
Putting an item into the auction house costs 0.1 gold.
The auction house price ranges around ~1.1 gold. Expected total profit is around ~0.0 gold. Player invested 200 gold in order to achieve the crafting skill needed to produce it.

In EVE Online players are forced to have high skill in production and marketing in order to have any profits at all. For newcomers it's near impossible to do any production related activity which is even remotely worth the time.

Why is this a problem?
It renders crafting to be more costly than beneficial in the very most cases. However, players should be incentivized to do crafting as some secondary activity, and not be financially punished for practicing it.

So a solution which comes to my mind is to create a better crafting system (but how?). However the fundamental issue might be the natural effects of market economies. It is not unfamiliar to the real economy to follow the same pattern. It's a price mechanism to prevent over-saturation and challenge business sustainability: If your product costs more than its production, that business is not sustainable; and if there is too much competition, you have to set your prices too low in order to keep up.

Let's stick to WoW and EVE Online as basic reference examples.
The questions are:

• Is this an issue at all which deserves to be fixed? Can it be fixed at all on a large scale?
• How can you fix it, or at least reduce that price pattern from occurring that much?
• Is there a way to have that solution remain being free market based and player driven?

Answer 1

The reason is often that the crafting process itself has no cost. If crafting is nothing but pressing a button, then you can not expect players to pay each other just to press that button.

If you want crafting to create value in your game economy, then you have to make crafting itself more expensive for the player.

• Make crafting more complicated than pressing a button. You could, for example, have minigame-based crafting which takes a while to craft an item. Just make sure the minigame is actually interesting to play.
• Add another cost for crafting which isn't tradeable, like a slowly replenishing stamina stat. This limits the crafting output of each player-character and forces them to carefully think what to craft. This in turn creates a scarcity of crafting services which drives up the price.

Another option is to allow players to form local monopolies or cartels in order to drive up prices. This requires two things:

• Small, controllable markets. You can achieve that by making it difficult and/or costly to transfer items from one game location to another, so you allow local markets to form. That means a global trade house is anathema to this strategy.
• Players are forced to specialize in one crafting discipline, but also require the services of a lot of crafting disciplines. So there might be a situation where there is only one potion brewer in a location but lots of players who need potions. The potion brewer is now able to dictate prices.

For completeness, I would like to also add a 3rd option which unfortunately is unlikely to work. You could always use your powers as game developer and do some price manipulation through the NPCs in your game. If you put an NPC in the game who buys potions crafted by players for 1 gold, then no player will be able to buy a potion from another player for less than 1 gold. But now you have a couple problems:

• You no longer have a free market economy in your game. (Ok, but who needs that anyway if you can create the illusion of one through NPCs?)
• You just created another money faucet which leads to inflation. (Ok, but that could be counter-balanced by adding more money drains).
• You might notice that players will increase the price at which they trade crafting material cost because the crafters can afford to pay more. And again, market equilibrium will be that crafters make little to no profit. Well, you could counter that problem in the same manner: add NPCs who sell crafting materials and thus put a hard limit on their maximum price. But then you will realize that you have a problem which is not ok: crafters suddenly have a very easy time to generate lots and lots of money from nothing. You are back at the root cause of the problem: crafting itself is just too cheap and easy for the players.