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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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Filed Under: economics, inflation, virtual worlds

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  1. identicon
    Straif, 7 Feb 2008 @ 6:50am

    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 (www.kingdomofloathing.com). 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.

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