#2: The collapsing stage
The next logical step in trying to sell your goods just a bit cheaper than everybody else. But once again, lets not forget that all this is happening on the very large scale. Assuming that there is more than one intelligent person in this game most of the people will want to sell their supplys quick and thus will all try to undercut each other.
I anticipate same thing happening with armor, weapons, treassure trail items, and just about everything. When the market is flooded the only logical outcome is the collapse of prices.
No, the only logical outcome is that the prices go to what the balance of supply and demand dictates. For something like yew logs, the market is already working fairly fluidly, it's already easy to find buyers and sellers for yews. For something like TT items, it can take a long time to find a buyer, which is why you hear a lot of ppl say they're going to put theirTT items up when the Grand Exchange hits. Lowering the transactional cost will have an effect on items that had a relatively high transactional cost before, but your analysis treats the issue like the marketplace for all categories of items was basically nonfunctional, which is pretty naive.
#3: The broken backbone
The last stage of the collapse is the collapse of the rare market, the backbone of the economy. All those merchants holding on to their hats, when they see how low the prices on everything are dropping will anturaly want to buy it all out and anticipate the prices to go up. Or simply buy it out and save it for skilling. However, where does one get the cash necessary for such purchases? Thats where rares come in. In hopes of buying things out and reselling for extreme profit later on or simply to use people will begin unloading their rares, which ofcourse will suffer from the very same price flood and in turn collapse.
How is the rare market the backbone of the economy? If every discontinued item were made nontradeable tomorrow, it would have zero effect on how I play the game. Of course the forums would be filled with people saying that the RS economy was dead, but that happens with every other update already. Jagex leaves rares in the game because some people enjoy trading them or having them as a goal, and they don't want to anger subscribers if it's not necessary. That doesn't make rares the backbone of anything, or important. (don't even go to the rares prevent inflation argument, a 2nd grader can see that's absurd)
I'll provide an analogy. Rares are collectible, in limited supply, and valuable. Kinda like... 1987 Fleer edition baseball cards are in the real world. Does that make baseball cards the backbone of the economy? Backbone implies structural function, do you know what part of the body is collectible, limited supply, and valuable? It's not the backbone, it's artificially overpriced diamond earrings. Not a perfect analogy though, diamonds have practical uses and are much prettier than RS rares. I'm not trying to flame you, I think merchanting is the most interesting (theoretically speaking) part of RS, although I don't do it very much in practice, and I respect your merchanting ability. But why claim rares are the backbone of the economy, without even offering a reason?
Your point about monopolies using the Grand Exchange is true, but it was already possible and there are drawbacks to the GE for monopolists also. Transactional cost being lower means it's easier for the monopolists to do more trades and impact the market more, but the GE will likely have many more participants than the RSOF which means it won't save the monopolists any more time and could dilute their impact.
Except everything about the monopolies is incorrect, especially about the rares. Why? Because 1) There is always going to be other players with the rares. And 2) These rares all have substitutes. The only way that those players could become a monopolistic rare selling 'company' is if they bought every single rare, of every single type. And they were the only players who had rares, then they hold the entire rare market, making them all a monopoly, because there are no more substitute type of items (The other kinds of rares), nor is there anyone else in the whole game who has a rares. That's the only way they could truly be a monopoly.
As for everything else, I agree with you Flammacor.
As for other people saying that the rares ARE the backbone of the society, you are incorrect in your notion. The Economy would not collapse if rares were punted out of the game. Why? Because an economy cannoy be supported by simply one type of buyers and sellers. If they left, then the economy would still run, there's other important markets to sell to. So stop saying Rares are the backbone of the Runescape economy, because it's not true in the slightest. (Well, it would piss people off a great deal, but the economy wouldn't crash!) So until you take some kind of College Intro to Economics, shut up about the rares being the backbone of the rs economy, it's annoying me.