The answer is pretty simple if you think about it.
There is no way to patch this economic perversion to have it make sense.
It doesn't have to make sense, just have the NPC's have wants and needs as well. Especially the monsters.
Coz Monsters have to get their stuff somewhere.
Let's take a simple value which we'll call the Dow Jones Index. Now, as players sell to NPC's, the DJI goes up, which affects how much the NPC's can afford, which lets them trade with the Monsters as well, which boosts the Monsters stats.
Then we add in a value, I'll call the Entropy value, which degrades weapons that aren't kept up to date. So the players, who are using the handy patchups supplied by the vendors are losing money to stay level, and the items stored with the NPC's degrade slower.
Then we add in the Merchandise value. For just a small fee, you can have the armour resprayed in any colour, or any design.
So Looting+Scavenging-Entropy-Merchandise gives the Dow Jones Index, which heads up and down for different continents, pushing traders and players from one area to another, making up their own commodity market.
In the deep swamps, Entropy is high, so there's a push to get any old rubbish in to turn into repair kits, so the DJI flies up making the monsters rock hard.
In the deserts, Entropy is low, and there's very few drops as it is, so the DJI stays low and the newbies frolic.
In the town areas, Entropy is medium, but Fashion is everything. People bring in any old crap to the towns purely to afford the merchandise, which is kept high to bring in trade. This keeps the DJI high, which means the Guards are rock hard.
Now, if people want to lower the strength of the swamps, they have to take their looting from the swamps into the city (or best of all the desert), lowering the strength there.
I'd need a proper economist to look through this, but if you've got traders melting down perfectly good swords to make sword repair kits for much better swords, then you're stopping the pyramid effect.