DarrkPhoenix: I can't speak for my personal experience (passed on D3), but I can try to explain my understanding of the situation from reading others comments on it. The core of the issue is that the auction house did not exist in a vacuum, but that other game design decisions were made with the auction house in mind, most notably the gear drop rates. In order to prevent the auction house from being absolutely flooded with gear the drop rates were set at a level where trying to reasonably gear up a character for end-game content with just self-found loot wasn't something that could be done in a reasonable amount of time. As a result, many players had the options of either grinding and grinding and grinding until they got enough lucky drops to progress, or hitting up the auction house. This is what bothered many people- the auction house wasn't something that could just simply be ignored, because the loot system was designed with it in mind. This point is reinforced heavily by the fact that the removal of the auction house is being accompanied by a revamp of the loot system. If the auction house truly were just something that existed on its own and could be ignored then it could have been removed without needing to redesign other gameplay elements.
Voila, you summed it up very well. This has been an issue from the very beginning - namely people ignore the fact that the game introduced a number of difficulties. On a very basic level, Diablo 3 offers the story, the entire shebang (which, mind you, I think is rather poor) in one go. Then you have the option of playing through the same game on an increasingly higher difficulty. This is the offering, the tribute, to the hardcore players, the ones who will end up playing the game for a decade, as opposed to the ones who will "play through" the game once. However, for some reason, people who are not willing to do the grind complained about this setup because apparently difficulty levels are arbitrary and the game is finished when everybody plays though it thrice. This is nonsense, but apparently unless everyone and their dog can "finish" the entire game, it is pants.
jamotide: Exactly, this concept of illegal markets seems to be really really hard to understand for many people (might explain modern prohibition,though). And what the other guy said, that this "enables" them to improve the game in other ways is just ridiculous. If they want to improve the loot system just improve the loot system. How does moving trades to ebay help with this.
It's probably very simple, the auction house system maintenance now costs more than the real money trade fees yielded.
The (amusing / shocking) thing is that a lot of the people who appear to be complaining about the game have not even played it.
vv221: This doesn't work on Battle.net, did you really think that such an exploit would have gone unnoticed? ;)
It worked for a fairly long time, if I recall correctly, up to until 1.07. But yes, this is the reason for why hacked items are still available in Diablo 2. They are not available in Diablo 3 because Diablo 3 is entirely server-sided.