EVE Evolved: EVE Online's not-so-free market

One of the most talked-about features of EVE Online is its player-run economy. Due to over 330,000 players living on one server, the markets have reached a critical mass where the laws of economics play out in a very effective manner. When there's a demand for something, no matter how obscure the item or low the demand, you can be sure there are dozens or hundreds of pilots trying their best to supply it. The in-game economy mirrors real-life economic situations so closely that CCP even hired a dedicated economist to analyse the market and advise CCP of any problems that arise.

EVE's economy is often referred to as a pure free market, but that isn't technically true. At its heart, EVE is still a game designed and implemented by a team of developers. All MMO economies require some degree of control and intervention for the game to remain playable. In EVE, this comes in the form of careful balance of supply and demand via changes to game mechanics and drop rates. There are also a number of more direct passive influences on the market, such as NPC market orders and insurance.

In this economic article, I look at a few of the influences that constrain free-market economics in EVE.

Insurance and the mineral basket

EVE's insurance system is intended to act as a cushion to ship losses incurred through normal gameplay, be it the end result of a good night's PvP or due to a PvE mishap. Platinum insurance pays out 100% of a ship's base mineral value and the policy costs 30% of that amount for three months of coverage. The intent with insurance is to reduce the cost of losing a ship by around 70%, depending on the price paid for the ship. The values it uses for the base mineral value of a ship were hard-coded into the database when EVE launched in 2003 and have diverged from actual market values over the years.

As EVE grew and evolved, mineral supply from mining, refining mission loot and other sources increased dramatically. As a result, the mineral supply to the tech 1 market began to vastly outstrip demand long ago. In a true free market system, this would push mineral prices down until a point where supply meets demand. In reality, however, the insurance system steps in to prevent prices crashing this far. Before Tyrannis, the market value of the minerals required to build a ship couldn't fall to below 70% of the NPC base price. When it did, it became profitable to buy minerals, build ships, insure them and then self-destruct them. This established a firm price floor for the "basket price" of minerals -- a weighted average based on the proportions of their use in ship construction.

For years, this price floor kept the price of tech 1 ships purchased in trade hubs at just over the 70% mark, making it almost free to lose them. With Tyrannis, CCP adjusted the base price of ships used in the insurance calculations to a figure closer to their weighted market average price. This was intended to restore the cost of losing tech 1 ships to normal. As players predicted would happen, however, the vast mineral oversupply on the market caused prices to drop to meet the new price floor. Insurance continues to play a role in regulating the tech 1 mineral market, establishing a price floor for mineral value.

Supply and demand

In a true free market, it's assumed that the laws of supply and demand play a core role in regulating prices. Market manipulation and anti-competitive strategies aren't constrained by outside influences like rules or laws. In EVE, that much is true, but the premise that supply and demand determine the mean market price is fundamentally flawed.

Supply of a given material or item is dependent not just on the number of people willing to spend their time to acquire it, but also on in-game influences and limitations. Supply of Dread Guristas modules, for example, might decline during a heated war in the north as people can't run high-end Guristas complexes as safely. Similarly, supply of Megacyte and Zydrine can climb dramatically when a large alliance or political power bloc begin full-scale preparations for war.

Perhaps the biggest influences in supply and demand are game mechanic changes from the developers themselves. While EVE has no laws prohibiting cartels, for example, CCP introduced the tech 2 invention system to break the cartels on popular tech 2 items such as covert ops cloaking devices, expanded cargoholds and cap rechargers. Changes to balance the market are implemented ever more frequently in an effort to keep the game playable for all pilots. To that end, CCP's lead economist Dr Eyjo monitors the market carefully, publishing his quarterly economic newsletter and making tweaks to correct issues that he finds.

Balancing act

When something new is introduced, Dr Eyjo watches the market for bottlenecks that naturally form in the production chain. He then tweaks supply mechanisms to eliminate that bottleneck and ensure that supply to the market isn't being significantly constricted by a single dominating factor. For example, when wormholes first came out with the Apocrypha expansion, tech 3 production was completely limited by the supply of hybrid datacores. In response, drop rates and the number of datacores dropped were both increased significantly.

Similarly, Sleeper salvage requirements in blueprints were out of balance with the proportions players were actually retrieving. As a result, common parts were in huge oversupply, with numbers of them building up on the market over time and prices falling rapidly. Conversely, the rare parts became expensive commodities and the only parts really worth anything.

In a real free market, we'd expect a price point to be reached at which demand is sufficient to absorb the entire supply of common Sleeper salvage items. However, since they have a single use and must be used with the rarer components, they have no inherent value outside of that use. Demand for those items is intrinsically tied to the supply rate of the rarer components. In response, CCP boosted the drop rate of one of the rarest salvage parts, causing the next-rarest material to become the new bottleneck. A similar example of this type of market influence is CCP's Tyrannis expansion initiative to balance mineral supply proportions with their use in ship construction. This series of tweaks altered what types of minerals you'll get from refining drone loot and removed much of the mineral-bearing loot from level 4 missions.

Summary

EVE's complex player-run market is often referred to as a true free-market economic system, but that's not exactly the case. When it comes right down to it, EVE is at its heart a game. To uphold gameplay considerations, the developers will always need to exert some control over the economy on a macro level. By managing the supply of materials and their usage in blueprints, developers can constrain most of the ship and module market to within reasonable limits. Insurance provides an ISK floor for tech 1 ships, invention prevents cartels on tech 2 items and CCP's economist works tirelessly to keep the cogs of New Eden turning.