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."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.
"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."
|Prices of selected items, Gaia Online (from Reddit)|
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.
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.