Every magic item in the D&D game has a listed "caster level" associated with it (see the Dungeon Master's Guide, p. 180-246, and any other book that details new magic items). Unfortunately, what should have been a simple statistical detail has become quite a confusing issue, mostly due to contradictory statements made by the D&D designers (as compared to the DMG rulebook itself). This article attempts to clarify this issues at stake.
"Caster Level" By the Book
According to the rulebook, "caster level" is a very simple attribute. According to DMG p. 178 (the most critical quotation on the matter), under the boldfaced heading of "Caster Level", the quality is defined as follows:
"For potions, scrolls, and wands, the creator can set the caster level of the item at any number high enough to cast the stored spell and not higher then her own caster level... For other magic items, the caster level is determined by the item itself. In this case, the creator's caster level must be as high as the item's caster level (and prerequisites may effectively put a higher minimum on the creator's level.)" (DMG p. 178)
The meaning is quite clear. In one type of case, the caster level is variable, and can be chosen by the item creator at any level which is high enough to actually cast the spells involved. This makes sense, inasmuch as the case is specific to "potions, scrolls, and wands", precisely those items which deal with a "stored spell" (above), and "directly reproduce spell effects", with costs according to specified formulas incorporating the selected caster level (as per the Player's Handbook, p. 78). The language in this case in large part repeats that on PH p. 78, in a paragraph under the heading "Item Cost", which is specific to those using the feats of Brew Potion, Scribe Scroll, or Craft Wand.
However, there is a contrasting second case (for all "other magic items"). What makes this case distinguished from the first? It's precisely that the caster level is not variable, that the creator cannot select it arbitrarily, that it is "determined by the item itself" (instead of by creator decision). This again makes sense, because nowhere in the D&D rules are hard-and-fast formulas given for prices incorporating variable caster levels, except for the potions, scrolls, and wands on PH p. 78 (and repeated in the "Creating Magic Items" section on DMG p. 244-246). As the above quotation explicitly notes, "the creator's caster level must be as high as the item's caster level"; similar passages exist in the sections specific to Armor and Weapons, that the listed caster level is a "caster level requirement" (DMG p. 179 and 183).
It is important to note that as of this writing, the above rule stands as the only official commentary on the subject as far as the D&D core rules are concerned. The DMG Errata has not altered the rule on p. 178 in any way. The Official D&D FAQ does not mention the rule at all, or that it needs to be interpreted in any different manner.
"Caster Level" According to the Designers
Unfortunately, at least two of the D&D designers have made (unofficial) statements which entirely contradict the preceding section. Sean Reynolds has been quoted as saying (at http://www.d20reviews.com/Eric/errata.htm#dmgerrata) that "The caster level is NOT a prereq [sic] and was never intended as one. We can sort of salvage that quoted text [DMG p. 178, as above] by changing the last sentence to: 'In this case, the creator's caster level must be as high as the item's MINIMUM caster level (and prerequisites may effectively put a higher minimum on the creator's level).'" Again, it's worth noting that this suggested change of language has not been included in the actual DMG Errata (or subsequent printings of the book).
Monte Cook, who by all accounts is the actual writer of the chapter on Magic Items in the DMG, has written even more extensively on the matter, devoting a whole article on his personal website to questions about creating magic items, and the notion of "caster level" in particular (at http://www.montecook.com/arch_dmonly3.html). Referring to the DMG, and making a point similar to Reynolds', he writes: "It doesn't say that you have to be the listed level to make a given item. It's not a prerequisite... caster level can be a variable [in all cases]." In fact, he goes further, suggesting even that "you could rule that the prerequisite spell dictates nothing in terms of caster level. You could set the caster level for the lens of detection lower than 5th. In theory."
In short, Monte's essay directly contradicts the definition of "caster level" that appears on DMG p. 178. In particular, his article does not recognize or mention the existence of the "second case" of magic items in the official passage; under the heading of "What is a Caster Level?", he quotes only the first half of the crucial paragraph, for "potions, scrolls, and wands", and then contends that those aspects are true for all types of magic items (in one example, he uses them for a carpet of flying). He writes, "Note what it doesn't say. It doesn't say that you have to be the listed level to make a given item.", even though DMG p. 178 does in fact say that "the creator's caster level must be as high as the item's caster level".
"Caster Level" Recommendations
Based on the current situation, I have to recommend that any conscientious D&D players deal with the "caster level" issue as written in the rulebook. The passage on DMG p. 178 must be treated as the official rule; until the designer's off-book comments are incorporated into the DMG Errata or the Official D&D FAQ (as even Reynolds admits would be a necessary change), they can only be treated as unofficial, non-playtested suggestions.
Furthermore, my belief is that the simplicity of the book rule is much preferable for gameplay purposes over the (say, Monte Cook's) alternative. The following reasons apply (among others): (1) It's clear that listed caster levels in the DMG are scaled up for more powerful magic items; retaining it as a minimum correctly restricts those items to more powerful creators. (2) It makes it easier to determine who can construct any particular item, since you only need to look at the listed "caster level", instead of back-calculating from the listed prerequisite feats and spells. (3) The "other" types of magic items are never listed with caster levels when found in any official D&D adventure publication, as would be necessary if the caster level was truly variable. (4) It's unclear if the "other" item types should have their powers adjusted in relation to altered caster levels (this might depend on whether items such as a circlet of blasting or a mantle of spell resistance are considered to have "variable" powers, as per DMG p. 178). (5) The spell-storage items, which everyone agrees have variable caster levels (potions, scrolls, and wands), are precisely those with explicit rules for pricing by altered caster levels (on PH p. 78, and DMG p. 241-246); other magic items do not have such rules given for them, and therefore are most easily treated as having fixed, static caster levels in all cases.
This last point bears further emphasis. If the "other" types of magic items (non-potions, scrolls, wands) had freely variable caster levels, then we would require some kind of commentary or rules on how the "market price" of those items changes with altered caster levels. No such rules or commentary appear anywhere in the core rules. (This is the case, notwithstanding the table on DMG p. 242, which is specifically intended for "items you invent", and whose formulas do not in fact match up with most core magic items, and "only provide a starting point" for pricing estimates, according to the sidebar on DMG p. 243). There is a significant set of core magic items which have very low prerequisites, but very high listed caster levels (such as pearls of power, robes of scintillating colors, vestments of faith, etc.), which makes it troubling to think that they might be, in fact, created by very low characters. (Do the base prices of construction get radically cut for players when they design them with a reduced caster level, or don't they? And why would the listed "average" caster level, according to Cook, of something like sovereign glue, be 20th level when it can be made by any 3rd-level cleric?)
In truth, I have, via personal email, asked Mr. Cook himself about these pricing problems implicit to his alternative ruling. I hope I didn't take up too much of his time in doing so, but nonetheless, his responses did not resolve the inherent lack of a system for altering caster levels of standard items. The first time I asked him what the effect on pricing was for altering the caster level of a non-potion, scroll, or wand, he responded that, "For most items it's spell level times caster level times some number. Thus, changing the caster level will directly affect the price." But, when I pursued the implications of this for specific items (such as any of the items with high listed caster level, but low prerequisites), then his recommendation was, "Don't change the price of these items for lower caster level. That's just for simple items like wands or potions." So, based on his several responses, it's still unclear whether Mr. Cook's system for pricing changes would be to (a) only alter market price in relation to altered caster level for potions, scrolls, and wands; (b) only alter market price for items whose minimum level for prerequisites matches that of the listed caster level; (c) only alter market price up for altered caster level, never down; or (d) something else entirely.
In short, it's best to treat the listed caster level for "other" magic items as a fixed constant, and a requirement for minimum creator level, exactly as the book says. Doing so avoids the lack of explicit rules for pricing such items when their caster level is changed, and simplifies the bookkeeping involved in tracking such items.
"Caster Level" Frequently Asked Questions
In the magic item descriptions, the "caster level" comes before the "prerequisites". This must mean that "caster level" is not really a requirement for the item creator?
Although both Monte Cook and Sean Reynolds appeal to this notion, it is, in fact, a straw argument. Even though it does not technically qualify as a "prerequisite", the Dungeon Master's Guide does actually say (in the definition under the heading for "Caster Level") that for non-potions, scrolls, and wands, it is a "minimum on the creator's level" (DMG p. 178). The sections on Armor and Weapons also define it to be a "caster level requirement" (DMG p. 179 and 183).
When the DMG p. 178 says that "for other magic items, the caster level is determined by the item itself", doesn't this just mean that the minimum caster level is determined by the item's prerequisites?
It wouldn't make any sense to write it that way, because then there would be no difference in the treatment of "other items" and "potions, scrolls, and wands", which are detailed immediately prior to the passage in question. If such were the case, it would suffice to simply write that for all items, "the creator can set the caster level of the item at any number high enough to cast the prerequisite spells" (exactly as for potions, scrolls, and wands). There wouldn't be two different cases for which the paragraph would need to be separated, like it currently is.
There are some magic items which separately list a spellcaster level requirement in the "prerequisites" section. Doesn't this imply that the "caster level" is not really a minimum?
First of all, practically the only place where fixed level minimums appear under "prerequisites" is in the special potions section of the DMG (p. 191-192), and with two exceptions, every single potion listed there has this unusual "spellcaster level" prerequisite (perhaps the section was written by a different person than the rest of the chapter). Secondly, in every one of these instances the "caster level" is lower than the prerequisite, so it still serves as a lower-bound in every case (the prerequisite does not intrinsically contradict the "caster level" minimum). Thirdly, and most important, if all items' caster levels were truly variable and not fixed, then there would never be any reason for these items to appear at the lower, ostensibly "average" caster level; every single potion creator would have the option, and gain every advantage from, choosing to create these items at their higher "prerequisite" level.
The fact that "caster level" is in some cases lower than the prerequisite "spellcaster level" is in fact support for the fact that creators cannot choose to create such items at their own personal level, even if they wanted to. Furthermore, it is the precise reason that the parenthetical language on DMG p. 178 is necessary: "prerequisites may effectively put a higher minimum on the creator's level".
In contrast, there is only one single place in the entire DMG where a fixed level requirement is specified under "prerequisites" which is lower than that of the listed "caster level": this being for the sylvan scimitar (on DMG p. 190). However, this appears as one of two paths for construction of the item, it could still be a relevant minimum for multiclassing spellcasters of several types, and it is even included in the Weapons section which in its introduction reinforces "caster level" as a minimum requirement (on p. 183). Therefore, it is really an anomalous case which only serves to emphasize that throughout the core rules, magic item "caster level" is designed to properly function as a minimum on any item creator's level.
Consider a pearl of power. The "prerequisites" say that the creator must be able to cast spells of the associated level (anywhere from 1st to 9th), and yet the "caster level" is listed as 17th. It can't make sense that you have to be 17th level to create a 1st-level pearl of power, can it?
Actually, it can (even though this is one of Monte Cook's specific examples to the contrary on his website). The added prerequisite is relevant because it guarantees that the creator can cast the level of spell that the pearl deals with; even some 17th level spellcasters may not be able to cast high-level spells if their primary ability score is too low. In fact, it makes more sense that a 1st-level pearl of power requires a 17th-level creator, than the possibility that any low-level caster with the Craft Wondrous Item feat can do the same, and yet on "average" all such pearls are made by 17th level casters (for whom a 1st-level pearl of power would be practically no use at all).
(Parenthetically, the pearl of power is another example of an item that creates a pricing dilemma if the caster level is allowed to be variable. Does a 3rd-level caster get to create a 2nd-level pearl of power at 3/17th the listed cost? Or does a 20th level caster not have to pay any additional cost for increasing the caster level, making his pearl of power tougher and have better saving throws than the listed one?)
When altering a magic item's "caster level" from that listed in the core rulebook, does the item's power and/or price get changed (and by how much)?
With regard to potions, scrolls, and wands, this is clearly allowed, the spell effect is altered normally for the specified caster level, and the price is altered exactly in proportion to the change in caster level. (As per PH 78, and DMG 178, and 241-246).
For any other type of item, no clear-cut rules exist. Nowhere in the core rules does it suggest whether or not a mantle of spell resistance grows more powerful with increasing caster level (from its listed 9th), or if vestments of faith grow less expensive with reduced caster level (from its listed 20th; although private email with Monte Cook has asserted that the price should not be changed). It is for this reason that I recommend sticking to the official rules as written in the Dungeon Master's Guide, that for these types of magic items, the listed "caster level" be fixed, and a minimum requirement on any item creator.
Appendix
For more discussion on designer comments surrounding the release of D&D 3.5 Edition, see here.