Tuesday, January 13, 2015

The Rabbit Hole: Monetary Inflation

In last week's post, I wrote about the five reasons that real money trading is bad for massively multi-player online games (MMOGs) according to a paper published by Dr. Edward Castronova of Indiana University.  In today's post, I'd like to tackle a subject that even subject matter experts disagree on: does RMT cause monetary inflation in the virtual worlds in online games?


The classic real world economic theory is that an increased money supply results in inflation.  But is that true in virtual world economies?  Dr. Richard Heeks of the University of Manchester disagreed in a paper published in the Journal of Virtual Worlds Research in 2010.  He pointed to studies that showed long term deflation in games with extremely active secondary RMT markets such as World of Warcraft, EverQuest, and EVE Online.  While he acknowledges that some games have experienced short-term inflation due to RMT activities, he disregarded the idea that RMT causes long term inflation.  He cites two major reasons:
"Over and above all this lie two further issues. First, a core premise about what makes virtual economics different is the question of scarcity, abundance, and cost of production (e.g. Lehdonvirta, 2005; Kelly, 2007; Shaviro, 2007). Parts of standard economics rest on the notion that items are scarce and have production costs. This is close to untrue for game companies; they can produce an infinite number of mithril ore veins at close to zero cost. At times, this has been used as an argument to justify the need for different economic models for virtual economies. But most virtual items are 'produced' twice before they enter the economy: first by the game company, and then by the player. At least for gold farmers, the element of difference is absent. Resources are scarce, not abundant; there are not an infinite number of ore veins or bosses, and they are rivalrous: whoever gets them denies others. Indeed, gold farming overall exists only because it combines virtual-world scarcity of currency and items with real-world scarcity and unequal distribution of time and money. Gold farming arose because those in the world with more money than time (player-buyers) can trade a scarce resource (gold, or items, or high-level characters) online with those in the world with more time than money (gold-farmers). In this sense, there is nothing particularly different or unusual about the economics of gold farming.
"Second, there is the game company: the virtual world's economic gods who ultimately control all inflows and outflows of currency and items, and impact demand. Game patches and redesigns may introduce new sources of in-game currency (such as daily quests in World of Warcraft), or new sinks (e.g. costly items like epic flying mount training in World of Warcraft); they may also increase or decrease the demand for certain items and for currency. These impacts are likely to far outweigh those of gold farming on prices. The company's ready ability to do this arises because they control the code that creates the world and its economy. In many ways, they resemble a national economy's central bank although they have transcendent powers compared to their real-world equivalents (and also different purposes – game companies care relatively little about the core role of a real central bank: the control of inflation and economic growth)." (p. 11)1

What Dr. Heeks wrote sounds good in theory.  A competent game company that pays attention to the virtual world it operates has the ability to mitigate the pollution caused by illicit RMT operations, at least where monetary inflation is concerned.  While inflation is definitely possible in the short-term, the power game developers have over the world should prevent inflation from ravaging a game's economy.

The Extra Credits series on ZVID.TV put together a video explaining how game companies control inflation and the money supply in MMOGs.  While somewhat conflicting with Dr. Heeks ideas about inflation, the video does go into some of the concepts in a more entertaining manner than an acedemic paper.



With so much known about the subject, game companies don't let RMT lead to runaway inflation in their games, right?  Most don't, but over the past few years gamers have watched a couple of games imitate the economy of the Weimar Republic.

The first example is well-known: Diablo 3.  The Mises Institute, an organization dedicated to promoting the Austrian school of economics, looked into the hyperinflation that rocked the Real Money Auction House.  One of the sources used was a illicit gold seller who indicated that some farmers were making 4 million gold an hour.  An article on the web site also pointed out that due to the RMT, players were totally avoiding the game's major gold sink:
"Aside from looking at inflation on that angle though, it is clear that currently there are little to no gold sinks available in the game, as the crafting market is completely dead – largely thanks to insanely high crafting costs for both gems and equipment.
"Coming in to the launch of Diablo 3, most of us (probably including Blizzard) assumed that the Blacksmith would be widely used – he was after all the only major gold-sink in the game. However it has proved that dropped items alone selling in the AH have been enough to satiate the appetite for the market, and crafting is just a waste of money when one could easily buy an optimal item from the AH rather than pumping 50-170k of gold in to a random item that will more than likely turn out to be junk. This in turn, has killed the majority of the commodities market, as salvaging anything but level 60 items is the worst option available.
"How did the crafting market turn out so bad? What went wrong? Well, I think it’s a combination of a few things:
- The big one: – Affixes too equally balanced, not enough “bad affixes” and not enough diverse, specific affixes (ones that just plain suck for X classes, while being good for Y classes). This makes Rare items too easily “good”.
- The massive Gold cost for crafting
- Rare item drop-rates too high (mostly from Elite packs, which easily drop 2 rares per kill, which is every few minutes)
- The fact that low-level items don’t drop in latter stages of the game, in essence making all rare drops top-level rares that are relatively good."
When a secondary market web site is pointing out issues in the economy (while helping to exasperate the problems), a game developer has some serious problems.

While Dr. Heeks maintained that real money trading did not contribute to long-term inflation in virtual economies, in his paper he pointed out several examples of RMT resulting in the devaluation of virtual currencies against the U.S. dollar.  With a broken money sink and professional gold farmers pouring millions of gold every hour into the economy, hyperinflation kicked in.  The author of the Mises Institute article reported that from May 2012 to May 2013, the secondary market RMT price had fallen from $30 USD/100,000 gold pieces to $1.09 USD/20 million gold pieces, a devaluation of 10,000%.  On the RMAH, the official price was $0.39 USD/million or $7.80 USD/20 million gold pieces.

If the purpose of the RMAH was to offer an alternative to the secondary market sellers, Blizzard's effort was not too competitive.  The RMAH finally closed in March 2014.

Sometimes, however, a game company doesn't need secondary market RMT to push a game's economy into hyperinflation.  In August 2013, Gaia Interactive began selling something called gold generators in its free-to-play MMORPG, Gaia Online.  According to Dr. Castronova and Dr. Vili Lehdonvirta in their 2014 book Virtual Economies: Design and Analysis, the impetus for selling the gold generators was complaints from new players complaining about the difficulty of purchasing items on the player-to-player marketplace.  However, the solution left those new players almost as bad off as before.

To say that the management of Gaia Interactive didn't mind the resulting hyperinflation is an understatement. In March 2014, Jason Loia, the Chief Operating Officer of Gaia Interactive, spoke at the High Tech Supply and Demand Summit about inflation:
"There’s an interesting phenomenon where we’re actually okay with inflation. If the money supply is growing, that’s just virtual currency, but the virtual currency means that if people’s balances are growing, it means people are getting richer in our community, and they’re able to afford more stuff, right? So, the things we have to be careful about are can we keep up with the clip to make sure there’s more Teslas and more Harley Sportsters out there to make sure people are buying at the right clip. ‘Cause if there’s not, you get the saturation of currency, and all of a sudden, you can buy everything you want and then you’re done. We never want that to happen. We want to make sure there’s always a good clip of really premium items out there for sale. And we don’t mind so much that there’s inflation as long as we can keep up with the goods."

"We track what we call an aspirational basket of goods, so that’s probably top 100 goods that we track. If you’re a millionaire inside our system, you wanna buy all those. And we make sure that the average millionaire can’t achieve all those aspirational basket of goods unless they give us a certain dollar figure. We don’t wanna really publish that, but we’d like to think that if they’re burning through their dollars, they’re gonna be done with our site. That’s a bad thing. We wanna make sure that aspirational basket of goods is always rich and filled."
Inflation is one thing, hyperinflation another.  At one point, players purchasing the gold generators were bumping into the cash cap.  In March 2014, the cap was raised from 2.1 billion gold to 9.2 quintillion (changing the variable from an int to a bigint), and then proceeded to sell a gold generator that gave more gold than the old level cap.  One user on Reddit tracked the prices of various items and came up with an inflation rate of 1 million per cent.

Prices of selected items, Gaia Online (from Reddit)
I had never heard of a game developer deliberately creating hyperinflation in order to fuel purchases on the primary RMT market, but the evidence points to Gaia Interactive doing so.  The game operator was aggressively chasing after the whales, trying to milk as much money out of them as possible.

The examples of Diablo 3 and Gaia Online show that the damage done to MMOGs is not restricted to activity on the secondary RMT market.  Blizzard opened itself up to trouble due to poor game design in combination with trying to operate its own RMT marketplace in Diablo 3.  Gaia Interactive didn't need any help from gold sellers to see the effects of hyperinflation; the inflationary policy that management decided to embrace in mid-2013 when selling Gaia Online gold in its cash shop grew rapidly out of control.

The example of Diablo 3 is especially relevant today as Blizzard flirts with adding a PLEX-like item to World of Warcraft to allow players to exchange gold for game time.  Dealing with inflation caused by the activities of gold sellers is something that game companies have experience countering.  But adding an RMT market to a game, or changing established policies, isn't a risk-free proposition.  Players of games with a long history of a primary RMT market like EVE Online may not realize the feature isn't something a company can add to a game without a lot of planning.  Blizzard has already failed to successfully implement an RMT market in a new game.  Hopefully adding (or expanding, depending on the definition of RMT used) an RMT market to the largest western MMORPG will have a happier outcome.


Notes:

1. HEEKS, Richard. Understanding "Gold Farming" and Real-Money Trading as the Intersection of Real and Virtual Economies. Journal For Virtual Worlds Research, [S.l.], v. 2, n. 4, Feb. 2010. ISSN 1941-8477. Available at: <https://journals.tdl.org/jvwr/index.php/jvwr/article/view/868/633>. Date accessed: 12 Jan. 2015. doi:http://dx.doi.org/10.4101/jvwr.v2i4.868.

11 comments:

  1. Inflation is mainly caused by a lack of sinks and consistent faucets. If all the money is going to a small set of channels, then RMT gains traction and compounds the issue.



    Using WoW as an example, RMT was an issue in Vanilla because there were only a few sinks but they were critical for progress. Sinks were managed in BC and more or less removed from WotLK, with a larger focus on cosmetics. In fact, WotlK's removal of sinks and inclusion of daily quests caused a massive spike in inflation. MoP's black market auction house is a prime example.


    D3, as you point above, is such an astoundingly good example of poor design work, that's it really speaks volume's to Blizzard's ability to develop new ideas. They had one of the largest virtual markets on the planet and learned nothing from it.


    RMT itself doesn't cause inflation. Poor system design and economic frameworks do. RMT is simply a solution to the age-old question, is this worth my time?

    ReplyDelete
  2. How come, third-party RMT is frowned upon and considered bad and according to some the cause of inflation.
    While RMT done by ccp in the form of plex is ok?
    In my eyes, its exactly the same result, just that ccp gets the money?

    ReplyDelete
  3. RMT is neither a source nor sink of in-game currency, unless you can trade real world money for in-game money that is created/destroyed by the game company. Very few games allow that. (Do any?) As such, RMT is at most a bad incentive, inducing players to farm who would not otherwise. This can certainly result in "inflation".

    ReplyDelete
  4. The RMTer -- third party or CCP -- is providing a service and can charge real money for it. They make a lot of money that way. So, yes, you're right -- from the buyer's POV, the result is the same except that CCP gets the money instead of some gold seller. But the thing to keep in mind here is that CCP getting player money is good for player generally -- it means CCP stays in business and can afford to add features. This benefits us all indirectly. A random player making a million dollars from EVE does not help anyone else.

    ReplyDelete
  5. I'd put it like this: RMT has some inherent downsides, but the worst aspects happen because it makes bad design worse. Inflation is spurred by RMT because it gives some players a out-of-game reason to farm gold / valuables far more intensively than normal. In a game with no RMT where everyone followed the rules, many people would look to get "enough" money while splitting their interest on things that they found more fun. The game still might have inflation (it got called "mudflation" and nobody was RMTing in muds), but probably not hyperinflation.



    The PLEX style system has a few offsetting features that make it better than normal RMT:
    1. The seller has less reason to farm unlimited amounts of gold -- the most you can extract in IRL value is your subscription(s).
    2. It adds more people to the game. Population is super important for a MMO. It's both RMT and socialism, rich players subsidizing poor players.

    3. The company that makes the game gets most of the IRL money, which in theory makes the game better.

    ReplyDelete
  6. Von Keigai,

    I believe your making a distinction without a difference here. While it’s certainly true that RMT doesn’t generate ISKies* out of nothing – somebody, somewhere does the in game labor. Accordingly RMT isn’t a faucet in and of itself but it can “induc[e] players to farm who would not otherwise” which, in practice, means ISK faucets get opened wider and wider. With this diversion settled can we kindly get back to the question at hand . . . “does RMT cause monetary inflation [producing behaviors] in the virtual worlds in online games?” Appears to me your answer to the question is . . . Yes.
    *Being and Eve player, I'll refer to Eve's currency.

    ReplyDelete
  7. Adding the second sentence to the statement adds the context.


    Sparkle Ponies, Guardian Cubs and Monocles are decent enough arguments as to the value of real money in a virtual economy.


    I made a few thousand dollars in RMT (or similar trades) in UO. Major cause of inflation, above and beyond just normal farming. That's simply not possible to replicate in WoW, and from Wilhelm's anecdotal evidence, EQ2 either.

    ReplyDelete
  8. asmiroth,

    Perhaps I'm dumb as a rock here but I fail to see how "Poor system design and economic frameworks [solely cause inflation]" adds much of anything to a discussion about RMT's possible connection to inflation. Quoting Klyith below gets at this, "Inflation is spurred by RMT because it gives some players a out-of-game reason to farm gold / valuables far more intensively than normal."
    Now . . .
    If 'good system design and frameworks' tend to reduce RMT's inflationary propensities you most specifically haven't denied RMT as a cause of inflation, rather you've specifically stated that it is a cause (among others) of inflation and thus must be mitigated by said 'good system design and frameworks'.
    Perhaps we're disputing the meaning of 'cause' here. I'm inclined to think "generates inflation producing behaviors" is a reasonable time to use the word 'cause'. You may disagree but such disagreement leaves me baffled about how you define the word.

    ReplyDelete
  9. RMT does not necessarily cause inflation; it's further elements of the game design that (may) do so. The two things are different. As such, while you can certainly say that you should leave inflationary faucets in the game and stop RMT, you can also solve the problem by finding and eliminating inflationary faucets.


    So yes, there is a significant difference, right there in the general topic of "game design". RMT does not cause inflation; it can do so indirectly in combination with other game mechanics as mediated by the player. The difference is in what do you do if you find inflation in your game and also there is RMTing? One way to fight it is to attempt to go after unsanctioned RMTers directly. (Of course, this does nothing to stop the inflation induced by players grinding for PLEX.) Another way is to redesign game elements. This would be effective against all RMT-prompted inflation, official or not. Obviously doing both is also possible.

    ReplyDelete
  10. Von Keigai,
    See my comments to asmiroth above. Similar to there, I suspect we are at heart disputing the meaning of the term ‘cause’. For lack of better language, you appear to make a distinction between ‘Proximate cause’ and ‘Ultimate cause’ (http://en.wikipedia.org/wiki/Proximate_causation). The hackneyed example for this distinction is “If an individual who was driving while intoxicated crashed his or her car and was killed, the Proximate cause of death was the crash. The Ultimate cause, however, was the individual's state of intoxication.”*

    One important difference between these two notions of causation is where you peg responsibility. Death was caused by the car accident but responsibility is placed on the drunk driver. Ultimate causation sees causal chains, Proximate causation does not.

    People often deploy Proximate causation to evade responsibility as it breaks the chain leading to them. Importantly, I’m not saying you are doing this. Rather, I suspect you are entranced with the idea of solving problems at the Proximate level in such a way that Ultimate causes play no significant part. To use our hackneyed example, self-driving cars make states of intoxication irrelevant. This leads to the question of whether a game with robust RMT (sanctioned or not) can be developed that won’t suffer from RMT prompted problems like inflation. I nominate Nozy to design such a game but if you want to make a go at I’ll remain equally intrigued.

    *I’m using philosophy terminology here. Legal terminology would label “Proximate” as “Immediate” and “Ultimate” as “Proximate”. Interdisciplinary examinations can get quite confusing.

    ReplyDelete
  11. Actually it is me that is after the ultimate cause here, this being the game design. Specifically, it is a system of faucets under user control. As I indicated with the example of PLEX. And indeed, there is "inflation" (or at least dilution, which is a precise concept) in EVE. The price of PLEX is now double when I started.


    I certainly hope you would not claim that there is some cause upstream of the game design that we should care about.


    I also hope we can agree that almost all causes of things that matter to us are human decisions. Because only humans can accept responsibility; we can change human decisions, as versus acts of God. I mean, yes "the car accident" killed someone. That's a figure of speech. What really happened is that human decisions, amplified by machinery, killed someone.


    So the question is, in EVE, what is the analog of the "human decision" as ultimate cause? Is it the actions of thousands of players collectively reacting to the game design? Or is the action of the game designer? I choose the latter. You seem to prefer the former.


    As for redesigning EVE without inflation, I did that in 2013. Cheers.

    ReplyDelete