Blizzard damn well knew what they were trying to do in introducing the Auction House, and quite frankly they deserve no pity. They call the AH a mistake, but it was a calculated risk; players' enjoyment of the game vs forced grind.
cdemares said:
The game's stat design, drop rates, and lack of item-based builds are the problem. The AH could have worked and can still work, just don't design the rest of the game to make it practically required. I don't care if other people want to farm, but don't make me do it.
The drop rates are fucked because of the AH.
(Also, the stat-skill system is designed specifically to reduce player skill as a factor for character performance, which in turn skews the value items even higher.)
By simple economics, there is finite Demand but infinite Supply. Given enough time, the game will eventually generate more desirable or even ideal items than the player population can demand.
Complicating matters is that all of Demand is also a form of Supply.
So why slash the drop rates?
To slow the depreciation of initial item values, and (vainly) try to slow the rate of inflation (gold).
If drop rates are sufficiently high to satisfy demand innately, there is literally no point to the AH (or any of those 3rd Party Sites/Black Markets the AH is supposed to "protect" the players from).
It all leads back to grind, and the sacrifices to gameplay designed to emphasize the grind.
Blizzard wants you to grind to keep you playing, and playing to keep feeding them revenue they didn't actually work for or earn.