More Evidence Of Why Virtual World Economies Are Risky

from the inflation-inherent-in-the-system dept

We’ve already discussed the inherent dangers of basing a business model on the economics of virtual worlds. While there definitely is quite a bit of trade in virtual goods (often for lots of money), it’s mostly based on ideas of artificial scarcity on goods that are effectively infinite. To drive that point home, Josh sent in an interesting story about a lawsuit between two founders of one such virtual world, where part of the complaint was that one of the guys effectively handed over the company to a third guy — who planned to make money by selling the game world’s currency, noting that once he controlled the company, he could just create an “infinite” amount of money in “a few minutes” and sell it at “below market” prices. While this suggests the folks in question had little sense of how basic economics works, it also highlights a pretty serious risk in these virtual worlds. At the same time that we’re seeing Ben Bernanke struggling with managing the monetary policy of the US economy, for virtual worlds where there really is no scarcity at all, the temptation to simply flood the market without recognizing the consequences is just too great.

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Comments on “More Evidence Of Why Virtual World Economies Are Risky”

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Josh says:

Not quite out of thin air

That any central bank or reserve can just create money “out of thin air” without consequence is incorrect. If more money is printed, than more will end up in circulation, and so its value will decrease. Simple economics. There is of course, more to this argument (involving other things that central and commercial banks do), but that’s the gist of it. In virtual worlds, well, who knows….

boomhauer (profile) says:

this is exactly...

what ron paul has been preaching years. While the fed tinkers with rates and the money supply, the result is inflation that kills savings, which is especially harmful to retirees who no longer have income.

You cant even hedge against this either… if you invest wisely and “keep up with inflation”… you still pay cap gains tax on your gains.

The justification is that cheap money promotes faster economic growth by encouraging spending yada yada. But explain how stealing from any savings i have is anything different than just that: stealing.

Straif says:

I haven’t played any of the traditional MMORGS since the original Everquest, (and perhaps many of the newer ones have addressed this issue) but there will always be people with more real-world money than time. If there isn’t a legitimate way for a player to exchange money for in-game currency or items, then secondary markets (often against TOS, and occasionally scam) will flourish.

However, if there is a legitimate way for players to buy in-game currency or items, then it provides a secondary profit stream for the game company. As long as it is done without upsetting the balance of the game it is a boon to the company and the players purchasing currency. And as long as there are a number of rare items that cannot be purchased directly with cash, the most successful or unusually lucky players also benefit as there are a number of wealthy players willing to buy the rare items.

The best example of this is the game Kingdom of Loathing ( The game is free, but relies on donations for income. For each $10 US a player donates, they get a nifty item (in practice, it isn’t so much a charitable donation as a means to purchase the item). That item, a Mr. Accessory, is useful in its own right, however, it can also be exchanged for the item of the month (this item is only available for that month–after that, if you want it, you have to buy it from other players), or other special items. The Mr. A can also be sold in the in-game market for a considerable sum (4 million meat last time I played–which was a while ago). Since there is an easy, risk-free way for a player to buy game money or items, there is little incentive for secondary markets (and, to the best of my knowledge, few exist). This keeps all real money going straight to the game company. Since there is no significant way for a player to exchange meat or items for dollars, in order to maintain the balance, the game company routinely has events designed to soak up excess meat and controlling inflation. Rather than enhancing the power of a player, they will frequently give the player cred or ego boosts–an untradable, but non-powerful item, a trophy, or their name on a wall. The game stays balanced, the parent company makes money, and the players have fun.

Alimas says:

I Never Got it

I never understood why people would spend real money to purchase something inside of an MMORPG. Isn’t that kind of like cheating? Doesn’t it take from the game? Aren’t the “goods” your purchasing potentially infinite in quantity and only existent before and after your purchase according to the whims of the MMORPG’s controlling company?
Isn’t that kind of wasteful?

I could totally see the free game donation thing, though.

Cheddar says:

Re: I Never Got it

I buy online stuff for real money mostly because many of the more popular MMORPG’s are designed to be time-sink’s, and people like myself that are married with children can’t spend the needed time in game to get the “stuff” we want. Throwing a couple more dollars to the game every month or so lets me keep up with my friends that devote hours a day to playing.. Cheating or not, it’s either that or not remain able to play with my online buddies..

Atheron (user link) says:

Virtual Economies

If you want to see this idea taken to its apex, check out Entropia Universe. The ingame currency is actually pegged at 10:1 with the US dollar.
I actually work for the company behind it, so I’m not going to pump out the sales pitch on you here. I will say this though, that while there are genuine points here e.g. that there is no real scarcity in real world terms, there are a lot of misconceptions also e.g. that money can be created out of thin air without serious consequences to the economy.
Also, I can understand that traditional MMO gamers may feel it’s cheating being able to buy your way to the top, but there are very few that actually do that. In fact I think the real economy adds a very exciting extra dimension to the game play.

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