The Economist has an interesting piece on the interaction between the economy in massively multiplayer games and that of the real world. The classic study of this question is Castronova’s analysis of the economy of Norrath, the setting for Everquest. Among various features of Norrath’s economy, one of the most interesting is trade with Earth through the sale of game items (weapons and so forth) via private treaty or on eBay[1]. This enables Castronova to estimate that the wage in Norrath is $US3.42 an hour, a figure that has some interesting implications.
At the Creative Commons conference last week, I heard a story to the effect that when the owners of one of these games tried to prohibit item trading they were sued and, in the course of litigation discovered that the plaintiff ran a sweatshop in Mexico where workers participated in the game solely to collect salable items. Clearly as long as the wage is below $3.42 there’s an arbitrage opportunity here. More technically sophisticated arbitrageurs have replaced human workers by scripted agents, working with multiple connections. Either way, arbitrage opportunities can’t last for ever, and are likely to be resolved either by intervention or inflation
The positive economics of all this are interesting enough. But how about policy analysis? Who benefits and who loses from this kind of trade, and do the benefits outweigh the costs?
It’s pretty easy to produce a model where no-one gains and all the ‘real’ inhabitants of Norrath (that is, people playing the game for pleasure) lose. Consider a model with two groups, Norrathians who play the game for pleasure, and Terran arbitrageurs, who are good at collecting salable items, but incur disutility from the work involved in doing so. As usual in economics, assume that the two groups are homogeneous. Suppose that each individual Norrathian enjoys the game more when they have more items than others, but that a uniform increase in the stock of items makes no-one better off. Consider the starting point before the arrival of the first Terrans. Each Norrathian is willing to pay a positive sum (in Terran dollars) for items, and we’ll suppose that this is initially higher than the cost to Terrans of collecting them. So, when the first Terrans arrive, trade begins. The Terrans are better off, but the Norrathians are worse off. Since they all expand their holding of items uniformly, they gain no more pleasure from the game than before. But they are now paying the Terrans for items. The problem here is that buying an item outside the game creates a negative externality for all players.
Now, since there are profit opportunities for Terrans, more and more keep arriving. New entrants keep entering the market until the Norrath-Terra exchange rate drives the return for Terrans down to the ordinary Terran wage, at which point the entire system is in equilibrium. Terrans are no better off, and Norrathians are strictly worse off. From a social point of view, encompassing both Terra and Norrath, the work done by the Terrans in acquiring items is entirely wasted. Hence, a welfare improvement can be realised by prohibiting trade.
I think this is basically the correct story, at least in terms of mainstream neoclassical economics. But there are some counterpoints to consider. As The Economist points out, one reason people pay to get items is that the early stages of the game (the ones you play when you don’t have many items) are less interesting than the later ones. This is a design flaw and extra-game trade is a warning about this flaw. I think a Hayekian could make more of this point than I have.
A second, more neoclassical, point is that, if Norrathians are heterogeneous, there may be real gains from trade. Time-poor cash-rich players may prefer to sweep past the obstacles, using money to smooth their path, while others may be happy to defray some of their costs by selling surplus items. I’m not sure if this works (why can’t the game owner capture all these rents and lower the average entry price), but it seems like an interesting argument.
I think there are deeper issues here, relating to the conflict between the kind of market rationality displayed by the Terrans in my model and the collaborative innovation needed to create virtual worlds, but that’s a story for another post.
fn1. I haven’t looked into the actual mechanics of this. But as long as trade is allowed on Norrath, it’s hard to prevent side payments being made on Earth.
John Quiggin 
JQ,
The second point [“Time-poor cash-rich players may prefer to sweep past the obstacles, using money to smooth their path, while others may be happy to defray some of their costs by selling surplus items.”] was the one The Economist emphasised. Acquiring items is a function of time spent playing the game. Time-poor players with money traded money for time. As The Economist points out, this has proved to be lucrative for those players who play the game a lot and well. The Internet has thus facilitated the trade in gaming labour.
I don’t think it’s any more complex than that.
Well, actually, that doesn’t make much sense, does it? It would make sense if we were speaking of widget manufacture, but do you play basketball so that you can acquire ownership of the ball? To some extent, the market suggest that there is something wrong with the entertainment product.
http://terranova.blogs.com/terra_nova/2003/09/fun_fame_fortun.html
Another point to remember is that terrans are not actually required in a MMOG, the company running the MMOG can simply just sell the items to the Norrathians themselves. Some games are already doing this, although it is not very common.
Responding to all three commenters, the situation where the game’s central planner (for whom items are free) sells them is a Pareto-improvement on the equilibrium I’ve modelled. But, I agree with Greglas that this looks like a game design flaw. An optimal game, I think would be one in which each level is the best available for players with the actual experience required to reach it.
One counterargument comes from switching games. A player who has reached a high level in one game might want to play at a similar level in others, without going through the various apprentice stages.
Fame! Or at any rate notoriety. This post has got a mention on a real blog.
I think crime is interesting to take into account, along with the usual economics.
In many MMORPGs, you can develop the skill of pickpocketing or thieving (or killing other players and grabbing their stuff). So to get items, you can:
* Earn items in the game without hurting other players.
* Steal items (or kill players and get their stuff) in the game.
* Earn money in Real Life (RL) to buy game items on ebay
* Steal in RL, or kill people and take their stuff, and use the money to buy game items on ebay.
You can be:
* punished in the game for thieving in the game (other players don’t like you)
* punished in Real Life for thieving and killing in Real Life.
BUT, the punishment doesn’t cross over the way the economics and trade does. You CAN’T be sent to jail in RL for thieving in the game, and you can’t be punished in the game for thieving in RL and using your booty to buy game items on ebay.
Maybe in 20 years if MMORPGs became all pervasive, you could be punished in RL for breaking rules ingame, or vice versa! Its not that weird – sportspeople can get hefty fines for breaking rules and bad sportsmanship.
The makers of the game ultima online had enormous problems with ‘evil’ players who liked to kill other players and steal. It was difficult to manage – they tried to allow this kind of play out of a commitment to realism and unfettered game play, but they also implemented an honour system to give new players some protection from player-killers. The honour system was very controversial and had to be repeatedly tweaked. In Everquest, you aren’t able to kill other players.
JQ, regarding the trade aspects, I wanted to also add that MMORPGs are not competitive for all players. Some people don’t play them to go up levels and acquire items. Most games are specifically designed to be very open-ended and goal-less. Competitive players probably hate people trading in real life, but many other players probably don’t care so much.
Online gaming economies can provide something the economics has never had.
The chance to perform controlled experiments.
Surely it only a matter of time before some enterprising economist starts to test out economic theories by working with the developers of a multi-player game and modifying this or that rule. It might be the start of a whole new field of Experimental Economics. Who knows? economics might end up with solid theories that make precise and accurate predictions backed up by mountains of experimental data and we will all have to stop calling it the dismal science.
Another very insightful post – thanks!
High praise indeed from the last commentator John – who sounds like they really know a thing or two about MMORPGs.
Good point Nabakov, I think I’ll leave that one and just delete the URL.