Virtual Bulls and Bears

Cyclical booms and busts will occur anywhere that an economy can be found, such is the nature of freely trading markets. Video game economies, however, have far fewer factors than the real-world economy. As a result, the economic forces encouraging booms and busts are both weaker and easier to nullify with ‘policy’. There are many drivers of economic growth in the real world but only a few of them apply in virtual economies. The following is a discussion of the ways in which game developers smoothen the economic cycle by intervening in the market to control inflation, the money supply, and the drivers of virtual economic growth.

Let us begin with inflationary pressures, and how they affect in-game economies. At any given time in an in-game economy, there will be a total sum of money (which I will refer to as gold) held by all the players – the money supply. How they store this gold, and what it’s called varies from game to game, but the concept holds true. This gold is valuable for its ability to buy or trade for items/services in the game. As players spend more time in the game, they earn more gold by killing monsters or completing tasks, but there is a delicate balance. If gold is found faster than new items/services are made available, the per dollar purchasing power of each unit of gold lowers, because everyone has more of it and the amount of items/services in the game hasn’t kept up. This is virtual inflation, because the value of 100 gold today is higher than it is tomorrow. In the real world, there are two types of inflation:

  1. Cost-push inflation, where suppliers’ input costs increase and this cost is passed onto the consumer in the form of higher prices
  2. Demand-pull inflation, when demand exceeds supply allowing suppliers to increase prices

In actual economics, there are several mechanisms that the central bank employs to control inflation, including the discount rate, reserve ratio, and open market operations, all of which exist in a somewhat simplified format within virtual economies. Interestingly neither source of inflation occurs directly in-game, because the suppliers (Non-Player Characters – NPCs) aren’t real and have only fictional costs, and the supply of goods and services is limitless. So how does inflation occur? The answer is fluctuations in the money supply.

Controlling inflation in a virtual economy revolves around balancing gold coming in, and gold going out. Gold comes into the economy via ‘loot’, or reward for enemies slain and/or quests completed. The only way game managers can prevent this total from piling up in the coffers of the players is to implement ‘gold sinks’, or places where gold vanishes from the game. Examples of these in popular RPGs include NPC interaction (buying items, gambling, repairing items) and in some cases in-game auction house taxation. I will cover in-game auction houses in more detail in the future due to their economic complexity. In the real economy, leakages and injections is the terminology used to describe this balance of the money (gold) supply, and there are three of each. I encourage you to Google them and understand that the mechanism works very similarly in both virtual and actual reality.

This balance of ‘ins and outs’ of gold pivots upon the gold reward rate to price for goods and services ratio:

Gold reward rate


Price for goods and services

The steadier this ratio is kept, the steadier inflation will be in the virtual economy, because neither will be increasing faster or slower than the other. Satisfying this condition would be a good first step to smoothening the money supply for any virtual economy. The ultimate reason that virtual economies do not experience debilitating booms and busts like the real-world economy is that most statistics can be monitored in real time, and policies such as raising or lowering the gold reward rate can be done instantaneously through a game patch. Factors such as population (player) growth rate and total player savings, and indeed the money supply itself, can all be invigilated constantly.

An example of this balance going horribly wrong came about several years ago, when news broke of Chinese prisons forcing inmates to ‘farm’ gold on various RPGs in order to resell it and turn a profit. This caused a massive injection of gold into the virtual economies of several well-known games, and developers struggled to implement policy to manage this sudden inflationary pressure. This threat of inorganic sudden inflation threatens the stability and ultimately the fun of virtual economies. Having fun is what gaming is all about, but if the fruits of players’ labour are devalued due to huge wealth elsewhere, gamers lose incentive to play. Large scale farming continues to plague virtual economies, and can be considered one of the greatest long term threats to the stability of any currency-based trading game.

NPCs have a bottomless appetite for purchasing and selling goods and services within a game, and are not subject to the universal economic law of diminishing marginal returns. This has a few implications for virtual economies. First, it means that NPCs can be used as influencers of the money supply, and that the item drop rate itself, rather than just the gold drop rate, will have a significant influence on the total money supply. NPCs can be thought of as entities of the central bank with access to bottomless funds transferrable for any loot you may wish to trade. The result is a heightened importance on the price offered by NPCs for everyday loot. With vast numbers of players in MMORPGs selling to NPCs, the sale price of items becomes a cornerstone of virtual economic balance because of its direct impact on how much money flows into the coffers of players selling loot. Second, NPC ignorance of diminishing marginal returns turns them into an effective gold sink. NPCs have unlimited quantities of many in-game commodities, such as potions, arrows, or crafting materials. Whether you need two or two hundred life potions, NPCs simply reach into their bottomless virtual goodie-bags and retrieve them for you. Like sale prices offered by NPCs, developers can tweak the purchase price of items in ongoing patches to influence the outflow of gold from the game. The effectiveness of these methods depends heavily upon the structure of any given game, as some require more interaction with NPCs than others, thus affecting the magnitude of NPC sale/purchase price changes.

Economic growth in the real world, in the Keynesian model, is quantified by aggregate demand and driven by consumption, investment, government expenditure and imports less exports; but can this model be applied to quantify growth in a virtual economy? It seems impossible without drastically and arbitrarily substituting in-game translations for each of the inputs. I don’t think it’s necessary (or even possible) to standardise a virtual economic growth model in a broad sense, because every game is so drastically different. The best way to quantify virtual economic growth in a game is to examine the total gold supply and account for the gold inflation rate. Once done, the total gold gold supply can be valued in real-world dollar terms at the going market rate for in-game gold to produce an actual dollar GDP of a virtual economy. This method is ultimately flawed, because of the arbitrariness of gold’s value in any virtual economy. In addition to this, good indicators of growth include population (player) growth, the productivity of each player – that is the rate at which each player gathers gold, and the savings rate of each player – meaning their propensity to spend the gold they find or save it.

Game developers aren’t faced with the same levels of complexity and inherent lags that challenge real world policy makers. This allows them to smoothen the economic cycle and reduce the impact of unpredictable fluctuations to the system. This said, they still face considerable obstacles to perfect stability, deriving from the inherent unpredictability of a freely trading market.


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