In-Game Economics 101

EDIT: Oh sure, Washington Post, put up your article at the exact same time I post this, referencing very similar things...  You're on my list, buddy.

Disclaimer!  Some of this discussion comes from the presentation "Understanding Virtual Worlds" that Michelle Kandalaft (a Ph.D. Psychology student and awesome gamer-gal) and I put together at the University of Texas at Arlington.  I am not an expert in Economics, though my mother drew a Supply-Demand graph on a napkin at Denny's when I asked why things cost money at the age of 4.  So, credit where credit is due to Dr. Kandalaft and my mother.

Also, the Amazon.com ad for The Worldly Philosophers: The Lives, Times And Ideas Of The Great Economic Thinkers [7th Edition] was purposeful.  If you haven't read it, you really ought to.

With Blizzard's announcement that Diablo 3 will feature a system for users to sell in-game items for real-world currency, gaming blogs and twitters have erupted with interest over the decision.  While to many this seems a formalizing of a long-standing system (gold-farming), the nature of in-game trade for real-life currency is not unheard of in Virtual Worlds.

TL;DR (because really, this is TL):  Economics is complicated.

More (and, lamentably, graphs) after the jump...



The notion of Economics in virtual worlds is nothing new.  In fact, some of the basic principles of Economics are apparent in every game: risk and reward.  The cost of the 1-up mushroom is that I might perilously fall to my death.  The more accessible (but lower powered) weapons in Fallout 3 cost less.  However, the blending of an in-game economy with that of our own (now global) one is something that is somewhat new (like, since the Internet new...)

Perhaps the most you know about in-game/real-world transactions comes from the notion of "gold-farming" wherein players (or sophisticated robots - programs, really), would perform menial tasks in a Massively Multi-player Online Role-playing Game (MMORPG) in order to harvest gold and then "sell" it off to other users for real-life currency.  This system was widely unchecked, and resulted in exploitation on both sides (credit card fraud, terrible exchange rates, and inhumane conditions for "farmers"). 


Gold-farming "sweatshop."

Gold-farming is hardly new, but with the interconnectivity (and titular massiveness of MMORPGs), it is much more open.  When playing MUD with my stepfather, this notion was somewhat ridiculous that I would use my allowance to buy money I could easily make by killing kobolds myself.

However, here is where Economics starts to fail us.  Why?  The study of Economics has always assumed that we are dealing with Finite Resources.  In-game gold, however, continuously spawns to a limit of infinity (that is to say, limitlessly).  So, to assume that real-world money is being paid to get in-game gold is a fallacy.  If we want to look at this using Economics (and we do!), we must realize that real-world money is being paid to buy time.

Now, here's a stitch.  You want to spend more money to spend less time playing the game...  It's like a freakin' Giffen Good!  (Not really, since with the purchase comes prestige, or at least the appearance of value.)

Okay, okay.  So back to Diablo 3.  We've been talking about MMORPGs so far, so let me really mess up your world when I tell you that Diablo 3 is a single-player/cooperative dungeon crawler hack & slash.  It also features an online Player v. Player (PvP) battle system (this is important for later).

I'd trade some in-game economy for that, if you know what I'm saying...

So let's assume Diablo 3 operates as a closed, set economy (I can't say for sure that it does, never having played the game).  This means that there is a set amount of gold, resources, and environment.  Nothing respawns, so it is a real economy.  After beating a particularly nasty beast, you obtain the Awesome Sword of Awesomeness.  There is only one of these, and it was pretty hard to get.  It has worth to your character and the in-game economy (a rare and luxury good). 

The Diablo 3 announcement (as I understand it) would let you sell your Awesome Sword of Awesomeness to any other player in their own, separate game (and therefor, separate game economy).  You could get it yourself, but you don't want to take the time for all that is required.  You would exchange the ASoA for a sum of real-world currency.  But how much?  As Publilius Syrus said, "Everything is worth what its purchaser will pay for it."  (Except, he said it in Latin.)

With only 1 ASoA on the market, it might sell for an outrageously high (or low) value, but as more ASoAs appear, an equilibrium will be established, and we'll have our old friend, the Supply & Demand graph:

Equilibrium (the point right in the middle) is price-point where supply meets demand.  This is important, because we are still dealing with a somewhat infinite resource: many people can buy the game and collect the ASoA.  This will increase the supply, but not really change the demand.  Resulting in:

Notice that the Supply 2 equilibrium is a lower price point than before.  Now, the ASoA is worth less, and its value will continue to decline as the market becomes saturated with ASoAs (read as: Awesome Sword of Awesomenesses).  There are two finite conclusions to this: 1) the value is the lowest tradeable value ($0.01) or 2) Blizzard creates a Price Floor.  A Price Floor would stop the price point from going below a certain level, which would be like government interference in a free-market (Adam Smith's invisible hand is rolling over in its invisible grave). 

Now, it's important to remember that this all represents the trade of real-life currency for in-game items (but really, for the time associated with gathering in-game items).  Many of you will look above the my comment that you are paying more to play less and wonder how this will be a good idea at all.  But micro-transactions do not run off of this theory, they run off of competition.

The most successful micro-transactions are based on competition.  "I have a better farm than you," or "Look at the high score I got by buying a multiplier."  And Diablo 3 has this in its PvP campaign.  However, this is little different than racecar driving.  Individual skill in the game is still necessary to compete.  Just having an ASoA means nothing if you can't swing the damn thing.  However, this is likely where the proposed system will have the most impact.

A booming Second Life economy.

There are games which are much better to discuss the Economics of virtual worlds.  One of them (and not even a game, really) is Second Life.  In Second Life, users create an avatar and interact with an environment.  Intrepid programmers have created clothes, landscapes, and avatar interactions (including that of fellatio) that you can buy with real-world currency.  Here you are paying for a product.  SL additionally has a robust in-game barter economy.

The Diablo 3 proposal - if nothing else - has bought the game a priceless amount of advertisement.  I hadn't even considered purchase until this popped up on my twitter, and now I've spent most of the morning thinking about it.  Add to it that Blizzard will certainly be keeping a slice of any transaction on the network, and you have just circumvented informal "gold-farming" by creating an in-game system that boosts revenue and creates pre-release buzz.  I'm pretty sure they won.