Sunday, September 30, 2012

Economists and Virtual Worlds

I've just been reading an interesting article on economists and video games; it seems that a fair number of other economists have thought about the research potential provided by virtual worlds, and at least two gaming companies—Valve (Steam) and the company that runs Eve Online—have found it worth hiring economists to help run their virtual economies.

I tried putting in a comment, but their registration software seems to be broken at the moment, so I decided to put the comment here instead, in the hope that my readers may include other economists with similar interests. Here it is:


Interesting article. I'm both an academic economist and a game player--WoW not EVE--and have been intrigued by the possibilities for years. Some time back, I had a blog post on the possibility of designing an economics course for students already active in WoW or something similar, using the game to teach economics.

Several years back my wife, who also plays, encountered a cartel on the auction house, was invited to join, declined, was threatened with predatory pricing—apparently the cartel operator wasn't familiar with the economics literature on the problems with that tactic. The attempt lasted for a couple of days before the cartel gave up. But I've observed continued, and apparently successful, efforts by the same player to push up the prices of various goods by buying up whatever anyone else puts up at a low price, then relisting it at a high price. Both my wife and I have engaged in occasional "auction house wars" with that player, undercutting her prices on something we produce in an attempt to drive the market price down.

On the general issue of arbitrage, it's worth noting that time is a cost and markets are often thin. So there may well be apparent profit opportunities that don't get exploited, due to the fact that the profit isn't enough to motivate someone to engage in arbitrage unless he also has fun doing it.

Reading your article, it occurred to me that someone ought to set up an email list for economists interested in virtual worlds.


Unknown said...

You may want to check out the movement of economists/libertarians (among others) in the Civcraft project. It's realllly interesting, because they've grouped into a number of virtual communities, factions, cities, etc. with the same ideas you just mentioned here in this article. They even have a "City of Rothbard".

Xerographica said...

Enchants in the pants!

The other day my gf and I were discussing whether people should be able to buy WoW gold with real money (For those who haven't played before...selling WoW gold for real money is strictly prohibited...but it happens anyways.)

Her initial reaction was that it wouldn't be fair. Then I asked her if it was fair that some people had more time to collect herbs, fish, mine, etc in order to earn gold (there are plenty of "legal" ways to earn gold on WoW but those are just a few examples).

Our discussion kinda reminded me about this discussion I recently had with a Ron Paul supporter who wants to get rid of our fake money system...

Xero: This is probably my all time favorite quote from you..."The invisible hand ONLY works with real money." Is the invisible hand working right now?
Travlyr: Not correctly. The invisible hand only works correctly with real money. That's the whole point. Since we are using monopoly money, then all markets are distorted. Your entire theory is based on allocation of fiat money that can be created out of nothing which has zero to do with production of goods or services.
Xero: If your money isn't real...then can I have all of it?
Travlyr: Actually most of my money is real. You can't have my real money, but you are welcome to all my fake money. However, I'm not going to deliver it to you.
Xero: Can you send it to me via paypal?
Travlyr: Indeed I can. Shipping and handling must, however, be paid in real money. I don't have very much fake money at the moment but I can get more. How much do you want?
Xero: Shipping and handling? It doesn't cost anything to send money vial paypal.
Travlyr: True enough. Shipping is virtually free through PayPal. However, handling charges will be paid, up front, in real money or else you don't get my fake money. How much fake money do you want and I will calculate the handling charges.
Xero: much would it cost me for you to send me $1000 via paypal?

Here's the context of the discussion... Xero and Douglas: The Invisible Hand.

Henry David Thoreau put it best when he said, "The price of anything is the amount of life you exchange for it." Which ties into Bastiat's bottom line, "treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race." We all want more for less...which is why allowing taxpayers to choose which public goods are worth their taxes (= time, blood, sweat, labor, effort, tears, life) most certainly would solve the fundamental problems of government.

joeftansey said...

When someone's buying up all your stuff, you look at their price and then price an iota lower. If they buy your stuff only to resell at virtually the same price, it's probably a loss to them because there's an opportunity cost to money (even in MMOs), and it will take him a moderate amount of time to sell it.

If you try to undersell him, your goods will move at lightspeed, and he'll just wind up with consistent profits.

MMOs all suffer from a fairness bias. People get in the habit of thinking X is worth Y, and it's near impossible to change that. So I'd say people trying to push prices higher have their work cut out for them.

That said, anyone selling significantly below the market/"fair" price can expect opportunistic traders to do his rationing for him :)

Rebecca Friedman said...

Not how it works, at least in WoW. If you can consistently produce however much of an item is demanded at a price significantly below the market one, your goods will sell like crazy and if someone buys them to resell them - you can always make more, and undercut -him-. He gets no profit, and eventually stops. If you undercut him by a tiny bit, someone else does the same to you - many fewer sales. And this pattern is pretty common; items often sell for prices far greater than the cost of their components. I believe it is because the cost of the crafter's time is so large, in terms of a game currency such as WoW gold. So if you value your time a little less... the "fair" price bias works for you.

(Market size may also factor in. This isn't perfect competition, there just aren't enough sellers; the price won't be adjusted perfectly in the first place.)

Laird said...

You might want to check out Neal Stephenson's new novel "Reamde" (yes, that's spelled correctly), a central plot element of which is a MMPRPG with a strong and carefully thought out economic element and a vibrant "external" market of game gold sold for dollars.

Laird said...

This is completely off-topic, but I HATE the capcha system used on this site. The letters are often completely impossible to read (squashed together, with serifs so bad you often can't tell what the letter is), and the photos of numbers are especially bad, often being completely illegible, too. Is this really necessary? Couldn't you use a better system? (I know they exist.)

David Friedman said...

Sorry about the Capchas. They are provided by Blogger,and I don't know any easy way of fixing them--if you do, by all means let me know.

Joe said...

To David:

In blogger you can turn off the capcha in Settings -> Posts and comments -> Word verification

David Friedman said...

I've tried turning off the capchas--I'll see if that seriously increases the amount of spam. There doesn't seem to be any way of adjusting the difficulty of the capchas.

Jared Imbler said...

Dr. Friedman,

I have always thought about the potential of MMOs to test economic theories, and one game that really stands out above the rest is Minecraft.

I don't know if you are familiar with it, but it's essentially a sandbox world-building game, coded in Java. This gives it the unique characteristic of being customizable.

I have tossed around the idea of approaching a few of my economics professors and seeing if we could set up a private server that runs the game and finding 1000 volunteers to play.

Some interesting topics/questions that could be asked:

What are the effects on private property in an infinite world? Does proximity have a value? Is that value diminished or eliminated by instantaneous transportation?

What are the unique characteristics of different currencies in an online world? Fiat, resource-backed, what about a time/labor back currency?

What unique systems of protecting private property could be implemented? How about legal systems? Maybe even study the development of a common law system.

You mentioned auction houses as a unique aspect of online games to study. What else would be of interest to you?

Unknown said...

Jared, check out my first comment about the Civcraft project. It is in Minecraft, and although it is not entirely economists it is a unique server in that you do see a form of common law and the beauty of order in anarchy. I don't know how you could create a fiat currency in Minecraft, really, especially since the convenience factor of fiat currency seems nigh on irrelevant in Minecraft. It is an interesting idea, and I'm intrigued by this interesting experiment.

Joe said...
This comment has been removed by the author.
DarQ DawG said...

I wasn't sure where to leave this comment. I have a couple of things I wanted to share so I thought this seemed like the best place.

First, what do you think of the bitcoin phenomenon? As far as digital currencies go, it seems to be one of the most successful since E-gold. The thing I like about it is it seems to be the first truly decentralized digital currency.

It worries me because of its tracking of all transactions in order to, I assume, prevent double spending and other shenanigans. Supposedly there are ways (TOR network, etc...) to anonymize yourself, or at least make yourself disposably pseudonymous. However, for an entity (like the government) with the resources to observe large portions of the Internet this seems dubious.

I'd love for you to do a post on it.

Second, I know of at least one alternative to CAPTCHA that's compatible with You can add a honeypot trap to your blog to trick robots. It's basically the opposite of CAPTCHA. Instead of trying to identify humans with something only they can recognize, it tries to identify robots with something only they can recognize.

You have to use a quicklink since you don't have access to's servers. Here's an article on that:

I've never used it, but it doesn't look too hard to implement.

Patri Friedman said...

I think what's going on with the resellers is that often producers supply less volume than the demand (either because they don't play often, it takes time to get the raw materials, whatever).

In which case the resellers can buy, relist, meet the demand, and not accumulate inventory. But if you craft faster than the demand, then they can't resell it all, and they get stuck accumulating inventory.

I've been on both sides of that.

Xerographica said...

Would WoW be...

A. less fun
B. equally fun
C. more fun

...if WoW gold was replaced with real money?

"You're going to give me 100 gold to teleport you to Dalaran? Sweet!!!"


"You're going to give me $1 to teleport you to Dalaran? Eh...ok"

Xerographica said...

Valve has a position open for an economist.