There is nothing more frustrating then getting a Legendary item to drop after a boss fight in Diablo 3, only to find that it is not as good as a Rare you have, or worse yet, a duplicate Legendary drop. Blizzard is looking at ways to fix that problem, as well as how to maximize farming monsters and minimize using the auction house.
In a post on the Diablo 3 blog, Game Designer Travis Day addressed several aspects of itemization, including changing Legendary and Set drops to reflect the level of the monster that dropped it, adding "game changing effects" to character-specific items, and dropping the frequency at which Rare items drop. On the latter point, he said:
We don't feel it's necessary to present the player with hundreds of bad Rares for every one that they might want. As an example, suppose items currently roll between 1-100 Intelligence. Now, imagine that we dropped 25% as many items, but the Intelligence range was instead somewhere around 75-100. In the end, you'd find fewer items, but more of the items you find would be worth equipping. That's our goal.
The team is also looking at ways to decrease the reliance on the auction house without eliminating it entirely, such as "targeted Legendaries" from named NPCs and coming up with a system that eliminates the randomness of Rare and Legendary items and makes them more useful for your class.