Sink or Swim: Markets and Money in Online Games

What the economies of MMOs can (and can't) tell us about our own, and why everybody should start paying attention.

by

Dr. Eyjólfur Guðmundsson has a small, dedicated team. Its eight members are solely responsible for analyzing scads of economic data that flow from powerful servers. They analyze the innumerable data points and convert them into useful information. This information, in turn, informs the economic policy behind millions of interactions between individuals and corporations.

Guðmundsson works in Iceland. But his data comes from the far reaches of EVE Online. The currency he tracks and plots in his position as lead economist at EVE developer CCP is ISK, the legal tender of a fictional future. His official role since 2007 as CCP's "own [U.S. Federal Reserve chairman] Ben Bernanke" (CCP's words) may seem absurd, but he is not alone. Trade plays a prominent role in games and developers are paying more attention than ever: Valve recruited its own economist-in-residence to inspect its burgeoning cross-game economy, and ArenaNet recruited one for the newly released Guild Wars 2. The economies are virtual, but they're real.

EVE Online, or Capitalism: The Game.

Trickle down

"In all MMOs you have what we call a sink-faucet model; money comes in through certain activities and money is taken out through certain activities … and money changes hands within the game," Guðmundsson said in an interview with GameSpot. "If too much currency is piling up in the game you will have inflation, and you could even have hyperinflation, where the currency simply becomes valueless."

The sink and faucet model differs from real economies in that currency is created and destroyed--not just cycled around--as a much more regular part of its use. But if it is properly managed, with the flow from the faucet (finding cash and selling junk to vendors, mostly) matching the drainage of the sink (buying stuff from vendors), the difference is moot to end users. Nearly every massively multiplayer game now employs a sink-faucet model--from EVE to World of Warcraft. But this wasn't always the standard.

"A real life vendor isn't going to buy a hundred iron bricks all for the same price, so why would we do that?"

The creators of 1997's Ultima Online, the forebear of today's massively multiplayer online role-playing games, wanted their economy to match their medieval setting. Isaac Knowles, an Indiana University Bloomington Ph.D. student focusing on the economics of virtual worlds, has studied their efforts and shared some of his research with GameSpot. "[Real] worlds don't have infinite amounts of gold, so why would we have that? A real life vendor isn't going to buy a hundred iron bricks all for the same price, so why would we do that?" He said Ultima Online's carefully crafted model of limited resources was meant to make the world more real, but "players hated it."

A few users hoarded huge portions of resources, Knowles said. Players doing business were encumbered by gold coins which had appreciable weight. Realistic? Yes. Fun? No. On at least one of the game's servers, iron bars were widely adopted as the new tender of inter-player commerce. Eventually, to combat the game's robber barons and the unwelcome complexity of much of its economic systems, Knowles said Ultima Online adopted a sink-faucet model.

Farmers' market

Other problems remained after most games got over their distaste for apocryphal cash flow. While some players corner the market for kicks, others do it for a living. Knowles said World of Warcraft's gold farmers (users who play solely to harvest in-game currency and then sell it for cash through a third-party service, which is forbidden by the game's terms of service) had a major impact on its early life. After a mass deletion of farming accounts in 2006, average auction house item prices dropped by 40 to 50 percent, he said. "When they were all deleted from the system, it probably caused kind of a recession in game while people were adjusting to this fewer-farmer system."

But while selling a game's wares for real cash may put farmers at odds with developers, it does have some positive effects. Their many auction listings made for a much more complete market. With multiple separate servers and much of each server's population unable to meaningfully interact (thanks to opposing player factions), transactions are limited even further. "You're not going to have an efficient market unless you have a large number of buyers and sellers, a complete market where you can find whatever you want as long as you're willing to pay the price," Knowles said.

The Great Farmer Culling of 2006 was very dramatic.

That's part of what makes EVE intriguing to gamers who like to play the market; their population is not divided by servers and neither are their commercial ventures. "It's cut-throat. It's an intense, winner-take-all kind of thing where everyone is looking to screw everyone else and some 300,000 people really, really love that," Knowles said (CCP reported EVE had 361,000 players as of May).

"Some people actually make … arbitrage trading as their main gameplay," Guðmundsson said (arbitrage means buying low in one market and selling high in another). Preserving the fun for price-speculating users while making necessary adjustments to the game--thereby indirectly impacting prices--requires finesse. Guðmundsson said CCP's policy is to never directly interfere with the game, and his team does not try to impose any layers of regulation past its built-in mechanics. With the basic rules of trade as incorruptible as any of EVE's other systems, he said, players know "if you trade on the market you will be getting what you think you're getting." Of course, that doesn't keep them from crashing the market on their own initiative.

Limited use

But can MMOs--by definition artificial experiences shaped by unbendable rules--ever present a truly free market? Guðmundsson thinks so. He said EVE's economy is "definitely the closest thing … to a true Laissez-faire that humans have interacted in." (Laissez-faire economies have only the bare minimum of regulations needed to protect property rights.)

"There is someone out there who is holding the strings in a very real sense."

Knowles was less certain. "By giving you the rules and saying, 'okay, go out and play,' that's as Laissez-faire as it gets," he said. But the developers set price floors (the minimum a commodity will fetch on the market, in this case how much non-player vendors pay), and they control the sink and the faucet despite leaving the basin mostly untouched. "In that sense it's not a free market," Knowles said. "There is someone out there who is holding the strings in a very real sense."

That is, of course, also how many real economies work, with cash flow monitored and modulated by the central banks, fiscal policy, and taxes and fees, Knowles said. So studying MMOs can tell us a lot about real-world economies, right?

Sort of.

Economic data is generated automatically when every interaction is run by the same system. Virtual economists need not worry over the estimates and potentially inaccurate polling mechanisms that plague their real-world colleagues. "It's a central banker's dream," Knowles said. This data can yield some useful trends after careful analysis.

The fact that they can do this is amazing. Trust them. (Source: EVE Insider)

Looking at the markets of virtual worlds helped Knowles better understand monetary policy and how people respond to different kinds of wealth. Guðmundsson said his submersion in EVE's figures "strengthened my belief that any regulation that is put on people's behavior on the market should be … only based on issues that relate around the efficiency of the market, rather than trying to steer consumption or trying to steer people's behavior through regulating market activity."

"We can do stuff on a daily basis that economists would never dream of doing but on a quarterly, or maybe just bi-annual basis," Guðmundsson said. "But at the same time … you start to see different kinds of behavior once you start looking at individuals, rather than aggregate numbers."

The problem may be endemic to the habitat: "It's a game," Knowles said. "People aren't playing the game necessarily because they want to play the economy. They're playing the game because they want to play the game. If the economy isn't fun, they can leave." Real life offers no such easy exit. "It doesn't matter, it's not like they'll die if they don't have any money. So maybe they just live out a cool fantasy, to just blow a huge wad of cash."

A non-representative sample is another big problem: Knowles said the MMO playing populace is more economically privileged and less diverse than the real world. These issues severely limit real-world applications of wisdom from MMO environments.

(Virtual) Reality

So translating knowledge from virtual worlds to real-life economies is difficult. But the two may become inseparable in another way. Guðmundsson said the markets of online worlds will matter more as virtual goods and services begin to displace real-life ones. More perfect simulations mean things which previously consumed significant materials and labor--like expensive cars and clothing--could be satisfyingly replicated and enjoyed by users.

"People would see that as production declining, which would be wrong because production is still happening, it's just happening in another universe."

"So [users] have moved their labor from real life into the virtual world. But they're still working and they're still providing value to other people. So from an economic perspective, nothing has changed. But from the way we think about real life today, people would see that as production declining, which would be wrong because production is still happening, it's just happening in another universe. How do governments take that into account when they think about their [gross domestic product]? How do people take that into account when they think about their income? Is having virtual income so that I can use that virtual currency in my virtual world and consume items there enough, so I can minimize my income in the other universe?"

These are questions many gamers may already ponder. Should I bring my lunch to work instead of getting take-out so I can buy a new champion in League of Legends? Should I get a fitted cap for $50, or buy 25 of them in Team Fortress 2? More people may begin to consider these trade-offs as substantial parts of their lives shift from the physical to the virtual.

Gamers, who have surprised Guðmundsson and Knowles with their intricate economic interactions in entirely fictional worlds, may just be ahead of the curve.

Discussion

0 comments
tgwolf
tgwolf

...that makes sense, but then that's why Capitalism and free market economy is ALWAYS featured in any games with economic systems--wow!--and why it is ALWAYS best in the real world--wow!

DarthNefarius
DarthNefarius

"he said, players know "if you trade on the market you will be getting what you think you're getting." "

 

The above is not quite true due to what is known as the Margin Trade Scam by many players ( which I believe is a broken mechanic involving esrows )

blahblahblah999
blahblahblah999

Spend real money to make imaginary worthless money.  Why can't it be the other way around? =(  Oh wait, banks do it all the time...

rfalstad
rfalstad

I'm curious how realistic this can get. Taxes on income and sales like real life, that cover services people really vote for in-game, something like fire-fighters (putting out spreading fires), medical (free or cheaper healing), etc. A prioritized list like we should have in real life, with a choice of factions or world team maybe.

starduke
starduke

When it comes to games, sure, I enjoy playing them and I'll even get digital copies.

When it comes to buying outfits and such for my ingame characters with real world money, I'd much rather buy outfits and such for the real world me.

midnight_trashh
midnight_trashh

Great article, I wish Gamespot would make more articles like this one so we gamers get more of an insight how things work. Really interesting for sure.

rb2610
rb2610

Wow, really interesting article, especially the link to the 'Burn Jita' thing.Gamespot would do well to do more of these sorts of articles :D 

scyldschefing
scyldschefing

So what happened during 2006 to cause most of the EVE economic indices to suddenly and permanently decrease and, at the end of 2006, to suddenly and permanently decrease even further?

sting5
sting5

Very good article, thanks!

J_Dangerously
J_Dangerously

Awesome article.  I'd love to see more posts dedicated to virtual economies.  Diablo 3 alone could provide a years-worth of discussion.

Gruug
Gruug

As per the conlcussion to the article....OR, maybe I should decide not be purchase DIGITAL ITEMS as I really don't own them and they have not real value. Was that not even considered?

Rippletonz
Rippletonz

Great topic, and well-covered. 

artyom570568
artyom570568

"An interesting article with a compelling conclusion!' You sir just hit the spot! i love the new and for a change very informative new articles and shows on Gamespot.

king_quaps
king_quaps

An interesting article with a compelling conclusion!

camyers1310
camyers1310

Not only is the article a great read, but is very refreshing to see this kind of article on this website. Keep up the good work Connor!

SRTBASH
SRTBASH

Awesome article. Really like it.

MoreThot
MoreThot

This is a good article. Also one of the reasons I love EvE is the market, you can pretty much do anything you want to. Its the actual freedom you receive that other mmo's say they have but don't.

Pete5506
Pete5506

Pretty good read, just think if things really ran like that 

jinzo9988
jinzo9988

I can understand the appeal to a game that's largely based on economics and trade.  People who wish they had that kind of monetary power can fulfill their fantasies, people interested in economics in general can sink their teeth into a 'simulation'(and I put that in quotes because it really depends on how you look at it), and it's really a different experience to what most games offer.  Too bad EVE doesn't have any actual gameplay though.

dr_jashugan
dr_jashugan

If games have real economies, what's the point in playing them? The REAL economy in real life right now is pretty bleak. People play games to ESCAPE from that sort of thing. :-o

Slayer_of_Bugs
Slayer_of_Bugs

Great article!  I'm majoring in economics and I found this article very interesting.  

jsmoke03
jsmoke03

nice article. don't see the point to it, but if these economists can help make a game better then so be it

Scorpid77
Scorpid77

Very interesting article concerning macro-level customer/player tendencies and how a virtual market works; nice indeed.

 

BUT there's a huge point that's being ignored: no MMO, none (EVE is the closest, but not there yet), has a real working economy that can parallel ours and that is because in real life we have limited resources and that's a backbone of Economy.

 

Sure, say in WoW you have to gather X mats and buy a stack of Y bars to craft that shiny sword. And sure, the price of Y has skyrocketed because it's difficult to get, few people gather it or there's a low respawn rate. Pretty similar to the supply/demand model we nearly live in. The thing is, in our reality, there's no respawn for that resource, and that's a game changer.

 

Say EVE, every bullet you fire must be crafted from an asteroid or other source; say you can harvest that spent shell and re-process it to it's original form, nice. What happens when the devs decide to inject more mats into the world? your limited resources are not so limited any more.

 

Say it's time for an expansion pack. Most of the values in the auction house/market have a tendency to drop, because in a few levels there will be new gear and ores to mine. We don't have that in real life (but we have wars, risk related decisions, political instability, etc. that have some importante effects in our prices). In our globalized markets, there's a lot of scarcity and limited resources risk that affect our prices. Maybe one day, when we colonize other planets and inject new resources to our sandbox, we'll have a scenario similar to virtual economy, at least for a short period.

 

Nonetheless, virtual economies are very interesting when it comes to witness typical market patterns.

BlackSquare
BlackSquare

Makes me think that if Washington was run by gamers the economy would of recovered by now.

CincoToes
CincoToes

Very interesting article, thanks GS and thanks Connor Sheridan.

DiaTheSwede
DiaTheSwede

By far the best article I've read in a long time! As far as "Should I bring my lunch to work instead of getting take-out so I can buy a new champion in League of Legends?" - That has happened to me numerous times.

 

On a sidenote, EVE continues to impress me every time I read stories like the one you linked, making me wish I had the commitment and time to fully immerse myself into the game. 

rfalstad
rfalstad

 @starduke Also depends on how much $ these things cost in game, a unique outfit or two is enough for me, and they can be traded for something new if that's what you want. Ethically you'd think people would be limited on how much they can spend on these things per month, which might help to clean up the image of addiction...but companies want to make as much money as they can, so...

Briantb_2008
Briantb_2008

 @midnight_trashh  It would be nice, the last artical about eve got me into playing it and I have to say its a pretty good game I've enjoyed it.

scyldschefing
scyldschefing

 @Gruug You completely and utterly miss the point.  We know that people ARE buying these digital items, simply because they ARE being sold (unless you think the vendors of these digital items are lying about their sales and success).

 

If these items are being sold (and they are), then we can consider the economic thought behind people purchasing these items, as there has to be some trade-off between purchasing a digital item and either using that money on a "real-life" expenditure or saving that money.

 

That's the economically interesting and relevant reasoning there. Your question is not related to the economics of this.

christos_bergy
christos_bergy

 @Gruug I disagree. They own these items as much as you and I own our digital music or anything we store "in the cloud". It might be that ownership should start having a different meaning as we migrate to the cloud.

potapithikos
potapithikos

 @jinzo9988 Saying that EVE doesn't have any actual gameplay is completely off the mark. I spent 7 years in EVE and never once did i focus on the market or economy.

Kayweg
Kayweg

 @Gelugon_baat It's a tough 'ol unforgiving game alright, but everyone can just do their own thing (and there's plenty). I'm in no way even close to being an economic analyst and get by just fine.

Nobody needs pie charts and graphs to "make a living" in EVE. But for those who like that sort of thing there is this complex economy to explore and exploit.

"Fun" can be more than meaty explosions and fast paced action, for some it can be number crunching and speculating on changing mineral costs. ;)

fatee
fatee

 @dr_jashugan Maybe in your nation it is bleak, Some people actually get enjoyment from trading currencies. It's a passion, and the same passion drives the real-world.

scyldschefing
scyldschefing

 @Scorpid77 Did you miss the part where they mentioned the "sink-faucet" model? True, that applies only to currency, and not to commodities and other valuables, but nonetheless in the article it's acknowledged that there isn't strict limitations on things like there are in the real world. It's also acknowledged that in-game mechanics, like gold sinks, simulate a limited supply. In the case of commodities, the "sink" would be mechanics like bind-on-equip.

 

As for there not being "expansions" in the real world, I completely disagree, and not at all for the examples you cited. Certainly historically there were examples of this, such as the discovery of the New World and the sudden in flux of South American gold and silver into Spain and Portugal. There's also the discovery of new materials or new processes for extracting materials, which can either make materials irrelevant or suddenly far, far cheaper. For instance, aluminum used to be extremely expensive and rare until modern extraction processes suddenly made it the cheapest of all metals.

-Shadowbinded-
-Shadowbinded-

 @Scorpid77 It's not a huge point being ignored, given the fact that, as they said, it's a game.  As they said when they talked about Ultima Online, people hate limited economies, probably because it's too much like reality.  Therefore, an virtual economy that can "parallel" this one is impossible, because people won't play it.  And they do mention how economy is affected when there's someone in control ("say it's time for an expansion pack, I think that'll fix the economy and bring more players").

 

So, basically, I don't think you're huge point is as huge as you think.  Would you really play a game in which you had to log in a few times a day just to buy virtual food so you wouldn't die, 'cause if you didn't your character will be deleted from the server?  Would you keep playing the game knowing that you will have to play all through a job for five days just so you can buy a new shirt on saturday?  So, making it closer to reality should yield better results; but, in doing so, you are left with no players, and that means you are left with no data.

alcari
alcari

 @Scorpid77 It's not quite like that in EVE, not in the short-term in real life. To stick with bullets, what actually happens is that humanity produces (random number) 100 million tonnes of copper. That's the total, limited, amount available that year. The same happens in EVE. A limited supply of materials is available, say 100 million units. There is a definite scarcity in EVE, as in real life. Even though the total amount in EVE is not limited, the supply per day is. Materials don't accumulate because, like in real life, it gets used, and destroyed. If there's a war in EVE, a demand for supplies, then prices rise because the supply is limited.

Gruug
Gruug

 @scyldschefing I think the reasons behind a person's choice to NOT purchase something is absolutely related to the ECONOMICS of the the situation. Yes, items are being sold but, the reason they are being sold is under the ASSUMPTION that they own those items. I really doubt anyone has read the little legal text that goes along with using those item stores. It clearly states that you are not considered the owner of said items.

 

mrsqwid
mrsqwid

 @scyldschefing  @Gruugif you buy a game and then buy a dlc or an in game item they are real so if you spent 10$ on a t-shirt or 100 t-shirt for character or sword or... 

it's all the same

Gruug
Gruug

 @christos_bergy  See my reply below. "Ownership" is not a consideration in digital gaming items. Ownership implies that you can "take them with you" which by agreement to use the store you forfiet in regards to those items.

potapithikos
potapithikos

 @fatee  @dr_jashugan Proper working economies in a MMO provide meaning for every other aspect of the game. PvP, PvE, Resource gathering, etc etc all these activities revolve around the economy they fuel it and in turn your actions gain more "weight" the consequence is more palpable than in any other MMO game especially the horrendously non immersive themeparks

Scorpid77
Scorpid77

 @scyldschefing

nice comments, but I still stand that the sink-faucet is an artificial device, just as much as game mechanics: they are dominantly controlled by one party, the developer. In our market, there are a huge lot of variables that control - and stabilize in the long run- the nature of supply/demand in a risk challenged scenario.

 

Regarding the expansion scenario, yeah, that's why I mentioned colonization of other planets, because in our current times, with a globalized market (that one is a stretch, I know), we have "exhausted" the possibility of new resources - until a new technology that uses other under-used resources arises. BTW, your example of the "New World" is looking at the effect of this influx in Europe only, not the global economy (primitive as it was back then); America (continent) suffered with the arrival of Conquistadores that exported gold to Spain/Portugal. In turn, a lot of the local economy suffered and current powers shifted, ending in wars, famine, slavery, progress...

 

Say, tomorrow we "discover" a new source of energy that is based around an odd resource (that is, considering the principle that we know all elements and there are none waiting to be discovered). That resource price will rise and current ones (ie. coal, petroleum, etc.) should fall. Still, you are working with a limited resource, and as such, you will not be able to exclude it from the behaviour of a market-driven economy; and that's far from being modeled yet in a virtual economy.

 

The fun part, IMO, is exactly what you say: introduce new resources (ie. cheaper materials, unknown properties) , in a short term they will surely affect the market, but on the long run, you default back to the same economy. What would be very interesting (if not short-to-medium term market-crashing), would be to discover the "free" energy that science is striving for (well, I hope). That model would supposedly require so little resources that it would render all of our economy obsolete. But that would be the subject for another article, lol.

 

Nice topic, nice to see fellow gamers/economists post.

Scorpid77
Scorpid77

 @-Shadowbinded-

Lol, nice discussion indeed!

No, my point is that we are talking about how virtual economies come close to reality and in my opinion they differ in fundamental levels.

 

But as to what I prefer in a game, without a doubt, I like this concessions! Imagine a starved economy in a game: players that have enough resources or are in a position to secure them in time, would have all the "fun"; I'd hate to be on the other end, lol!

Scorpid77
Scorpid77

 @alcari

 Well, that's exactly why I say EVE is as real as they have come to emulate an economy. But they are still not there and, frankly, I doubt I'd enjoy playing a game with a full economy too.

 

Nonetheless, that is one of the pretty things about EVE that you don't see in other games and it makes it so special to its fan base.

rfalstad
rfalstad

 @Gruug  @christos_bergy it's like having a phone App or Cinemax, you pay for extra content/capability, but you don't have to. Cosmetic and Entertainment, makes people happy :)

Kayweg
Kayweg

 @Gelugon_baat Yes, i'm fully aware of those, m8. And that's certainly one of the more unpleasant sides of the game, and i understand that it can be off-putting.

But navigating a minefield is a lot easier once you have an idea where the mines are placed.

It's always gonna be a niche MMORPG, not least for the reasons you mention.