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Making/Money: Economic Equilibrium is MIA

Alexis Kassan

When I first started playing MMOs I was in college. I'd bounced from major to major but ultimately settled on Economics (from a starting point of Medieval and Renaissance Studies - how'd that happen?). Like other economists in games like EverQuest and Ultima Online, I was thrilled to find a lively economy and interested to apply classical economic models in the study of it. The most basic of these models is the typical supply and demand curve.

Any economic model starts with price and quantity. The higher the price, the more suppliers want to sell but the less consumers want to buy. As the price decreases, more consumers are interested in purchasing, but fewer suppliers are able to produce profitably. In theory, there is a magical level in the middle where supply and demand meet. That is equilibrium (see graph).

What I have since found, which is furiously debated by other economists in the field, is that the typical supply and demand curves do not fit well with the economies of most MMORPGs these days. Depending on the game, add-ons used, and availability of additional market data, there may be sort of invisible caps to the price, and thereby the quantities, of goods traded. Furthermore, auction house fees and vendor sales act much in the same way as taxes or subsidies in real world economies.

Pre-auction house MMOs mostly used local chat, meaning floating text in various forms, to advertise when people were looking for an opportunity to purchase or sell. Most times, this sort of economic banter was found near the bank in a large city area, whichever had the highest potential local populace at a given time. In Ultima Online, this was usually the bank in Britain. In Runescape, it used to be the World 1 Varrock bank.

The dynamic changed with the advent of the auction house in games. This created a set-and-leave trade system so that it was not necessary to be present and spamming chat in order to find a buyer. You could simply post the item and log off, allowing potential buyers to browse in your absence. Since the virtual economy was in a persistent world, the system could take care of the transactions whenever the buyer was found and store the proceeds for you.

The first instance I have been able to trace of a centralized, persistent, virtual economy was EverQuest with the Bazaar. Other games had persistent stores earlier, such as the Ultima vendors stationed at houses, but they were scattered throughout the world and often difficult to find stocked.

Since then, there have been trade halls or auction houses of some form in most MMORPGs. Even games that had once sworn off economies, such as City of Heroes, have since introduced them (for CoH, it's called the Consignment House but it serves the same purpose). Each one takes a percentage of the final price as a sort of service fee for the privilege of posting your item for sale. This functions in much the same way as a tax. As a supplier, you might calculate into the price the amount that you will have to pay in fees so as to still get the profit you want on the sale.

The graph below shows the model of what happens when taxes are imposed on economies at equilibrium. Assuming that suppliers figure in the cost of fees/taxes in the price, the total quantity of the item traded decreases. This makes sense as, ostensibly, the cost to produce is higher resulting in decreased supply overall. The amount of tax collected would go to the government (or in this case, the game server - presumably to be distributed to freshly-spawned creatures). And this leaves a small amount essentially lost to all. That is the amount between the level of traded goods and the former equilibrium - where it says "gone" in the graph. Since it is not traded, suppliers do not receive anything for these items and the government does not collect taxes on it.

In practice, unless an item is worth very little, the auction house fee is not usually a big consideration - especially since most items are either relatively easy to procure or, failing that, rather high-ticket. Where items are of little value the game steps in with NPCs ready to buy at a set price. This is similar to a consumption subsidy where the government will purchase goods at a price higher than the market one therefore creating a secondary market for produced goods and keeping suppliers in business.

Another interesting comparison between auction house fees and taxes can be made between the amounts paid by different players in games and different citizens in a country. Several in-game systems, such as that of EVE Online, have a sliding scale of transaction costs based on skills, faction reputation, level, or some other non-economic characteristic. These sliding scales are the inverse of a typical graduated tax structure. A graduated tax is one similar to the income tax in the United States where those with higher incomes pay a higher rate of tax than those with lower incomes. However, in games, it is usually the case that as you gain levels (and therefore have access to higher value items) you actually pay a lower fee percentage than those who have not gained the same stature.

All this begs the question, how do you know what price to set to begin with? There are some indicators such as rarity or utility, but the precise amount would be a mystery if previous transaction data was not available. Some games, such as EVE Online, provide very transparent transaction data so that you can decide upon offer or purchase prices. Others, such as City of Heroes or World of Warcraft, provide listings of only the most recent transactions.

Of course, you can always scan through what the current prices are, but that may not be reflective of general market conditions, especially if the pickings are slim. It may also lead to an implied price cap on a good where suppliers might otherwise be able to glean more per item.

For example, if you went to the auction house in WoW in order to sell a stack of twenty light hides and saw that another player was selling the same item for two gold, you might choose to post yours for about the same (maybe a little less so that a buyer would purchase yours first and save a few silver over the other seller). There's nothing to say that a buyer would not be willing to spend five gold on the item if all the information you have available to you is what is currently shown.

On the other hand, if no one else was selling light hides, you might post yours for ten gold. Without knowing that buyers were willing to pay only up to five (again, just an example here - I do realize that light hides generally go for much less) you may not sell the item at all. Either you would be undercut by another seller, especially if you set-and-forget the post, or the auction would simply expire. Knowing what the market can bear makes all the difference here.

That's where add-ons such as Auctioneer come in. They amass historical data in order to determine a price appropriate to prior conditions. The data can become stale if updates come out and the database is not refreshed, but generally they provide the transparency that would otherwise be lacking for making informed pricing decisions. The longer you keep the database, the more information you will have to work with and the closer you will likely come to the other prices in the market.

It is important to note that, due to the way data is gathered for Auctioneer, your suggested prices are not necessarily at equilibrium. All the mod is doing is taking the prices that other people have used and gathering them with the assumption that their average will yield the market price. If no one has yet sold the item for what would otherwise be an equilibrium price, then the suggested price would not be near it. Going back to our example, if everyone who has sold light hides for two gold per stack since you had started gathering Auctioneer data, then you would see a suggested price of two gold, even if the market could bear five.

In a sense, MMORPG economies have gotten simultaneously more and less realistic. They have made advances towards mimicking real world economies by introducing consolidated public markets, integrating limited data transparency, and allowing for subsidized purchases. At the same time, the limits placed on data available mean that equilibrium may never be reached in virtual economies.

Do you consider the auction house fees into pricing before posting? Has it ever caused you to vendor trash an item rather than selling to another player? Do you use mods to keep track of price fluctuations? Ever pondered these economic concepts on your own? Please, share with the class.

Alexis Kassan is a numbers nerd. She spends her days with statistical programs and her nights with spreadsheets and textbooks. She's also a MMORPG addict, having gotten sucked into Ultima Online at a formative age. In her time away from work, books and games, she can usually be found drowning in pools of sprinkles. If you have a question about in-game economics or how crafting fits in with them, hit her up at alexis DOT kassan at weblogsinc DOT com.