Real World Economic Structures in Massively Multiplayer Online Games

Travis Savo, Marcus Riedner, Sean Murphy


Table of contents

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Abstract

Motivated by the widespread problem of inflation within the economies of Massively Multi-player Online Games (MMOGs), we propose a structure for an in-game economic system based upon real world economics which can be adjusted with relation to inflation and economic value. This structure can be implemented in MMOGs such that the in-game economy can be easily tuned to ensure it's health.

In particular we identify a flaw inherent with the methodology of the current generation of MMOGs concerning how they deal with the minting of currency and inflation in their economy, and explore a possible alternative method by which the community self-regulates the economy in conjunction with the game providers. The suggested solution relies on applying real-world market structures and values to the economy, thus serving a market already in great demand and growing.

The typical solution for dealing with those who seek to exploit the flaw described in these economies is to ban them from the game and have their in-game wealth seized. The solution we are proposing is novel in that the same type of behavior that was once punished is now expected and even encouraged, with the economy dynamically correcting as needed to control inflation. A further benefit of the system is the legitimization of what is otherwise considered the inflationary activity of buying or selling in-game currency for real-world money.

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Introduction

A Massively Multi-player Online Game (MMOG) is a type of online computer game in which a large number of players interact with one another in a virtual world. Typically these virtual worlds feature an economy based on an in-game currency and the trade of in-game goods, where the players themselves take on the roles of consumers, producers, shippers, and sellers. For our example these markets are Oligopolies where the buyers generally outnumber the sellers who are enabled through a form of secure escrow, markets are segmented by both space and time, barriers to entry and exit are moderate, transaction costs vary, and market information is imperfect or even unavailable. The in-game currency is typically provided as a durable abstract construct (i.e. a number noting the amount of currency you posses), but can take the form of virtual goods as well. In these "MMO Business Games" the goal of the in-game economy is to support a "fun" business game of trading and crafting, which involves the buying and selling of goods and services between players.

With these types of economies, in-game currency is created through player-to-game exchanges, where players perform some predefined task such as killing a monster or mining for some gold in exchange for in-game goods or currency. The in-game goods or currency are brought into existence without additional cost or penalty to the game provider, thereby arbitrarily increasing the total wealth in circulation. In-game wealth is subsequently removed from circulation when the players pay the game world for goods or services.

In theory traditional economies exist to try to reach perfection in the form of Pareto Optimality; an efficiency where no party involved can improve their lot without burdening another party. In contrast in-game markets do not exist to reach this perfect state. They are meant to be "fun", and as such, economic structures that are traditionally considered unhealthy by economists may be considered "fun" in the context of these game economies. These markets generally do not exist to enable Parento Optimality, so behaviors like monopolies, unchecked restrictions on free markets, oligopoly behaviors, fraud, etc. become partially desirable from an entertainment perspective.

The problem with traditional MMO Business Game economies lies with inflation: As a result of the design of these economies, inflation is rampant which makes participation difficult since cash value is constantly being lost regardless of interaction with the game. The widely accepted way to measure achievement in a MMO Business Game is via relative wealth, as making money is part of the fun in the experience of a MMO Business Game, so unchecked inflation represents a serious barrier in these types of games.

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Inflation

A healthy economy is one where the available currency is in relative balance with the amount of goods being produced. The general price level for a particular good is affected by the amount of currency in the economy as well as the amount of goods being produced. We can describe the price of goods as the money in circulation multiplied by the propensity of people to spend (the velocity of the economy) divided by the quantity of the goods available:

Price = Money x Velocity / Quantity ( P=MV/Q )

Inflation is the change over time of this formula: When the money in circulation goes up, and the velocity of the economy does not slow in proportion or the quantity of goods does not increase accordingly, the price of the goods goes up as a result, so the same amount of money buys less of these goods, and value is lost.

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The Problem of Open Sources and Fixed Sinks

Traditional MMOG economies have currency sources, which are opportunities to mint more in-game currency, and currency sinks, which are opportunities for in-game currency to leave circulation. The problem with traditional MMOG economies is that currency sources are bound only by the player's ability to mint new currency via player-to-game exchanges, while currency sinks are generally fixed and do not scale in proportion with the sources. Players, acting in their own self interest, use the open currency sources to mint in-game currency which allows them to purchase goods and services from the game and other players. Unchecked, they will do so at a rate which overwhelms the fixed currency sinks, resulting in an rapidly inflating economy, and a poor business game.

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Sources Closed, Sinks Fixed in Proportion

To control inflation, the minting of in-game currency must be limited by something other than player's demand to mint it, or a predetermined rate at which it can be minted. Changing the rate at which it can be minted does not solve the problem because it creates economic barriers when the rate changes in proportion to demand.

The proposed solution to the problem of open currency sources is to tie-up a physical or monetary asset of the player's when in-game currency is minted, and free it up when the currency is removed from circulation. In our example we use real world money for purchasing in-game currency as the monetary asset of choice, with the understanding that it can also be cashed back out through the same currency exchange. Tying real world money to virtual currency is a natural thing to do because a market already exists explicitly for accomplishing this (IGE.com being the most prominent example), so the currency already has real world value. By tying real world money to the minting of currency, in-game currency sources are limited to what the market will bare instead of what players can demand. This ties currency in circulation directly to the velocity of the market, since people will respond to changes in velocity by purchasing more currency when velocity increases, and cashing it out when velocity falls. Player based currency sinks (players cashing out their in-game currency for real world money) are still limited to what value they can provide the market, so are also governed by market velocity since a lower velocity means less sales opportunities. The challenge then becomes keeping the velocity balanced: too high and there is a barrier to entry, too low and players will liquidate their in-game currency, and the amount of currency in circulation will fall, causing a depression.

Velocity can be partially controlled through currency sinks, because increasing the currency sinks increases the rate at which currency is leaving circulation, thereby decreasing velocity, with the reverse also being true. If the market velocity goes too high, the number of sinks can be increased to slow it down, and if it goes too low, the number of sinks can be decreased to speed it up. Through these actions velocity can be adjusted in proportion to the now limited currency sources on an ongoing basis to achieve whatever inflation rate is desired. Managing inflation becomes a matter of balancing currency sinks and quantity of goods to reflect the load of currency sources and market demand.

Thus the problem can be dealt with dynamically: By monitoring the size and velocity of the market it's possible to compute an appropriate "game difficulty" which adjusts currency sinks and production rates to compensate for changes in the market. As the economy grows, the level of production can be increased to meet the new demand. When velocity slows, the game can become a little easier in the form of less challenges or lower barriers to entry, which in turn stimulates the market since less currency is leaving circulation.

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The Problem of Affluence

With a currency exchange economy, affluent players are needed because they grow the economy, but they create an economic barrier for less wealthy players. The problem is that currency exchange economics allows for players to purchase a large amount of currency, increasing inflation, and putting them at an advantage over players who can not purchase an equal or greater amount of currency.

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Affluence and Poverty Working Together

Some possible solutions to the problems posed by affluent players are:

  • Make the wealthy players dependent on the less wealthy players such that the less wealthy players can do something the wealthy players are unwilling or unable to do, and willing to pay to have done.
  • Provide cheap or free beginner equipment, which ensures less wealthy player have the minimum they need to get by until they graduate to a higher wealth level in the game.
  • Give the less wealthy players a valuable commodity, which causes deflation.
  • Give the less wealthy players more starting currency, which causes inflation.

Of the four options above only the first is a good long term solution to the economic barriers created. The problem with supplying cheap or free beginner equipment is that you destroy the low end market segment of the economy, a potentially vital market for low-end players. Giving poor players commodities or currency causes the economy long term problems as currency becomes worth more or less, thus unbinding it from the fixed sources model.

To prevent wealthy players from locking other players at a low wealth level in the game, barriers for affluent players must be established that can only be overcome with the help of other people, and cannot be circumvented by money or smarts alone. By disabling certain functionality without the cooperation of other individuals, game wealth is forced to trickle down into the hands of the less wealthy players because people can demand compensation for their time, effort, and potential risk. This in turn must be balanced against the opportunities in order to establish a healthy codependency between affluent and less wealthy players. Another solution is for less wealthy players to form co-operatives and collectively build a wealth base in the game. Communities are able to work at the same level as wealthy players by pooling their resources to obtain the same level of in-game wealth.

In either of these strategies, it's important to keep quantities of goods and currency sinks in proportion to ensure inflation doesn't overrun the economy, and players aren't tasked unduly with economic burden. Fortunately this is a much more manageable task, since minting of currency is no longer uncapped and relates closely to velocity.

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The Problem of Established Players

Players who have already established their place in the market create barriers for non established players because entry into a saturated market segment is difficult when it is dominated by an existing force, and requires an investment to penetrate. Established communities will jealously defend their profits from people who try and encroach on their market segment.

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Market Segmentation

Markets must be segmented enough to create the demand for new segments which can be filled by determined non established player. If markets are segmented by space, then space must be able to expand in order to allow new market segments to develop, and players must be forced into the expanded space. Likewise if the market is divided by time or technology level, then the nature of the game must take that into account to ensure healthy populations across all market segments. Finding the right balance here is critical, because an imbalance on either side can quickly result in a depressed or hyper-inflated market as market segments dominate or starve.

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The Problem of Gray Markets

"Gray Markets" are the use of a third party to circumvent game economics and/or game mechanics. Typically this describes the activity of purchasing or selling in-game currency for real world money via a third party provider. This has become the de-facto standard for playing a typical MMOG because hyper-inflation has created a high barrier for players wishing to progress in the game. This activity then causes a raise in inflation as more currency is minted to fill the inflated demand, further exacerbating the problem. The current solution employed is to eliminate players who are "abusing the system", sacrificing revenue streams in the name of game economy balance. This solution has proven to be largely ineffective because the Gray Market continues to grow at a rapid rate in response to a growing demand.

The Gray Market functions on a standard business model, where the cost of getting goods and the revenue from selling goods represents their operating margin. In typical MMOG economies the potential margin is unbound, set only by what the market will bare, since minting currency costs only the labor involved in playing the game. Even when the managers of the game implement an in-game currency that is tied to real world assets, the Gray Market can circumvent the system by buying and selling currency at lower margins than the official in-game currency exchange.

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Limiting Margins to Limit Gray Markets

The simplest way to control the Gray Market is to control the operating margin their exploitations can function under. If you lower their operating margin, they will make less money per transaction and have to rely on volume. If you lower the margin far enough, the volume increases beyond a cost effective range to operate a business.

To lower the potential margin of Gray Market exploitations, the official in-game currency exchange must operate at low margins, at cost, or even as a loss-leader, making it cheap or free to move money in and out of the game. Since in-game currency is now a fully recognized currency when referring to prices of the in-game market, any third party transaction outside the game can safely be considered acceptable, or "White Market". If the mechanisms being invoked are already supported by the official in-game market and currency exchange, they can not be exploited. When the barrier to currency exchange is lowered, the only place to make a profitable margin is on the market itself. So in essence any third party transactions are just another way of "playing the game", and can even be supported and endorsed through external programming libraries or APIs instead of banning them.

Ultimately Gray Markets can be rendered largely inconsequential to game proprietors as players may prefer the officially endorsed markets and currency exchange to a third party. In addition revenue estimates from these currency exchanges are low compared to the market potential within the economy itself, unless the economy is rapidly growing or shrinking. Legitimizing behaviors which are good for the economy and already in demand is a good community building tool as well.

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Conclusion

Traditional Massively Multi-player Online Games have inherent flaws in the design of their economic systems. By tying in-game currency to real-world currency and implementing real-world economic structures in MMO Business Games, it should be possible to eliminate the problem of constant hyper-inflation while enabling the economic structures most desired by players in terms of both value and fun.

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Glossary

  • MMO Game - Massively Multi-player Online Game (MMOG) is a type of online computer game in which a large number of players interact with one another in a virtual world.
  • Player - A participant in an MMO Game.
  • Manufacturer - Players that produce consumable and durable goods in the game. In most games these are known as "crafters".
  • Consumer - Players that purchase and potentially destroy consumable and durable goods in the game.
  • Economics - The study of how supply and demand allocates scarce goods and services in a society.
  • MMO Business Game - A game where the players are both consumers and manufacturers of goods and services. Some markets might be served by computer agents, but for this paper an MMO business game is primarily a Player vs. Player game.
  • MMO Economy - In an MMO Business game, markets for goods and services are created where goods have variable supply, demand, and therefore price, all of which are controlled by the players. These economies are valid in terms of real world economies because players use real world money to buy and sell virtual goods or currency in the game.
  • Inflation - The loss of value for a given currency due to changing economic factors.
  • In-Game Currency - MMO Economies use their own form of currency to facilitate the market. While most games don't officially recognize it, this currency is directly equitable to real world money because it can be readily bought and sold for real world money. It is also subject to inflation and deflation.
  • Currency Source - A way in which currency in an MMO Business Game is minted. Traditionally this is done through a player-to-game exchange where the player performs some act or deed, and the game mints the currency and gives it to the player in exchange.
  • Currency Sink - A way in which currency in an MMO Business Game leaves circulation. Traditionally this is done through a player-to-game exchange, where the player pays the game for a good or service.
  • Pareto Optimality - This is the standard that most economists use to measure the effectiveness of any economy. If an economic system is Pareto efficient, then it is the case that no individual can be made better off without another being made worse off. It is commonly accepted that outcomes that are not Pareto Optimal are to be avoided, and therefore Pareto Optimality is an important criterion for evaluating economic systems and political policies.
  • Goal of a Real World Economy - Achieve Pareto Optimality.
  • Goal of a MMO Economy - Support a "Fun" business game of trading and crafting. The game involves the selling and buying of goods and services between players.
  • Perfect Market - Numerous Buyers and Sellers, Homogeneity of Product, Freedom of Entry and Exit, Perfect Market Information, No/Low Transaction Costs.
  • Oligopoly Market - Buyers Outnumber the Sellers, Variation of Product, Barriers to Entry and Exit, Imperfect Market Information, Low to Moderate Transaction Costs.
  • Monopoly Market - One seller, multiple buyers, Homogeneity of Product, Insurmountable Barriers to Entry, Market Information Irrelevant, Variable Transaction Costs.
  • Black Market - A market operating outside the established market structures because the goods being sold are contraband or otherwise illegal.
  • Gray Market - A market operating outside of the established market structure, although not actually illegally.
  • White Market - A market operating within the established market structure.

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References

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