Economic Theory and MMOGs

AGDC – September 7, 2006

Sam Lewis

What is this about?

Summary of 2 GDC Roundtables

• Monetary Policy – managing the money supply

• Market Structure – creating a trading structure

• Industrial Organization – creating crafting/business relationships

Who Am I?

Sam Lewis

• Currently Lead Designer Cartoon Network

• Senior and Lead Designer SOE

• Designer and Producer Kesmai

• BA and MBA in Economics

What is Economics?

The study of how the forces of supply and demand allocate scare resources in a society.

Price

Quality

Supply

Demand

Price

Quality

Supply

Demand 1

Demand 2

Why Use Economics?

• MMOGs are Social Games

• Analyze Current Phenomena

• Make Design Decisions

Price Movements

Thanks to Dan Speed – EVE Online

Natural Market Places

Thanks to Ahn Sang Hoon - Seal Online

Final Reason

“You can’t screw it up any worst than it already is.”

- Gordon Walton

The Money Supply

Objectives

• Sufficient cash for the

economy

• Avoid monetary collapse

• New players aren’t “poor”

Monetary Collapse

Could be Considered Fun

Plan for Commodity Currency

• Divisible

• Uniform

• Storable

• Durable

• Compact (High Value/Weight)

P= MV/Q

• P = price level

• M = cash in circulation

• Q = quantity of goods

• V= the velocity of money

Hyper-inflation

Depression

Healthy

Quantity Theory

Quantity Theory

P= MV/Q)• Healthy

– Holding cash maintains wealth.

• Hyper-inflation

– Holding cash loses wealth.

• Depression

– Holding cash increases wealth.

Hyper-inflation

Depression

Healthy

Quantity Theory

P= MV/Q• Control Price via Money Supply

• “Poor” Players via Market Prices

Hyper-inflation

Depression

Healthy

Faucets and Drains

Player-to-Game Exchanges

• Faucet – Player selling to the game

• Drain – Player buying from the game $

Faucet Player Control

DrainGame Control

Faucets and Drains

• Players control cash creation– If they need more cash they open up

the faucets

• Drains are fixed– They stay the same size regardless

of the Price Level

• It will become Hyper-inflated– Its just a matter of when

$

Faucet Player Control

DrainGame Control

Solutions

Tie the Drain to Price Level

• NPC Prices rise and fall

• Auction

• Transaction Tax$

Faucet Player Control

DrainGame Control

Transaction Tax Example

Two Player Economy

• Adventurer needs bullets to kill mobs to get cash

• Crafter makes bullets

• Crafter sets price based on demand

• Crafter pays both a fix offer charge and percentage sales commission

Transaction Tax

Money Supply

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Time Period

Money Supply

Adventurer Cash

Crafter Cash

“Poor” Player Issue

Because Prices Increase-

• Value of starting cash declines

• Faucet stream “too” small

• Can’t buy good stuff

• Makes new players dissatisfied

Solutions

Non-inflationary Solutions –

• Have NPCs provide basics

• Make elder players dependant

on a starting commodity or

service

Market Structure

What Market Structure should be used?

• Real World Economy Objective – Pareto-optimality – resources optimally allocated– Perfect Market

• Game World Economy Objective– Fun – players are engaged and can win– Oligopoly

Market Structures

Perfect EconomyOligopolyMonopolyBarter

Structures Approach Perfection

Market Structures

• Numerous Buyers/Sellers

• Homogeneity of Product

• Freedom of Entry and Exit

• Perfect Information

• No/Low Transaction costs

• Secure Transactions

• Infinity Divisible Goods

• Few Sellers, Many Buyers

• Substitute goods

• Barriers to Entry and Exit

• Imperfect Information

• Transaction costs

• Secure Transactions

• Infinity Divisible Goods

Perfect Market Oligopolies

Few Sellers

• Fragment the Sellers by Location

– EQ one Auction House

– EQII two Auction Houses

– WoW three Auction Houses

– SWG one planetary commodity/many player

vendors

• Fragment the Sellers by Time

– EQ must be logged in

– WoW offers for limited time period

Many Buyers

• NPC Vendor of Last Resort

• Consolidate the Buyers by Location– SWG commodity auction info was server wide, but

you had to go and pick it up– EQII buyers view other auction info and purchase

for a higher price

• Consolidate the Buyers by Time– Posting offers to buy

Substitute Goods

Differentiate Goods Based on -

• Effectiveness Tradeoffs

• Esthetics/Fashion

• Scarcity

Barriers to Entry

• High Fixed Costs– SWG shop investment (house, tools, location)– EQ and EQII significant time investment

• Specialization– WoW one resource and one manufacturing skill,

but need 3 or 4 to make an item.– SWG (old) max two crafting skills, but need 3 or 4

to make an item.

Imperfect Information

In conflict with few Sellers/Many Buyers

• Create Arbitrage Opportunities– WoW market tracking software

• Future Economic Events– There players working payroll cycle

Transaction Cost

Player’s Currency is Their Time

• Make it Expensive to Change Vendors– SWG - have to pick up – WoW – time to get to the other locations– Makes location based competition valid

Security and Division

• Allowing players to cheat on a deal causes more customer service problems than it is worth

• Making goods indivisible means getting rid of cash

• Play with these at the risk of destroying the business game

Industrial Organization

Study of Industrial Structures

•Market Structure

•Manufacturing Chain

•Competitive PracticesConsumables

Equipment

CrafterAdventurer

Key components

Resources

Crafter

Crafter

Industrial Organization

Consumables

Equipment

CrafterAdventurer

Key components

Resources

Crafter

Crafter

Typical MMOG Relationship

•Adventurers Sells Raw Materials

•Others Supply Sub-components

•Crafter creates Final Product

•Sells Adventurers Items

Industrial Structure

Design Issues

• Manufacturing Chain

• Over Production

• Elder Dominance

Consumables

Equipment

CrafterAdventurer

Key components

Resources

Crafter

Crafter

Chain Solutions

• No Independent Crafters– Make sub-components– Make final products

• Competition on 4 Ps– Price– Product– Place– Promotion– (Predation)

Consumables

Equipment

CrafterAdventurer

Key components

Resources

Crafter

Crafter

Over Production

Caused by Oligopsony Structure

• Advancement Independent of Manufacturing

• Destroy Overproducing Factories

• Make Items Consumable

Elder Dominance

Caused By Natural Monopoly Structure

• High Fixed Costs

• First In Advantage

• Constantly Declining Marginal Costs

Declining Marginal Cost

• Cost to Produce Always Cheaper

• First–In Always Under-Cut

$

Quantity

Marginal Cost Curve

Overproduction Solutions

• Cap Quality– Elders make the same quality item

• Cap Cost– Elders cost the same, including wastage

• Use Comparative Advantage– Elders move on to supply their market

Conclusion

• Simple Economic Theory Provides Insights to Design Decisions

References

• Terra Nova

– http://terranova.blogs.com

• Flying Scythe Monkey– http://www.flyingscythemonkey.com/

• Eve Developer Blog (Dan Speed)– https://myeve.eve-online.com/

• Synthetic Worlds– Edward Castronova