The Economist has an interesting piece on the interaction between the economy in massively multiplayer games and that of the real world. The classic study of this question is Castronova’s analysis of the economy of Norrath, the setting for Everquest. Among various features of Norrath’s economy, one of the most interesting is trade with Earth through the sale of game items (weapons and so forth) via private treaty or on eBay. This enables Castronova to estimate that the wage in Norrath is $US3.42 an hour, a figure that has some interesting implications.
At the Creative Commons conference last week, I heard a story to the effect that when the owners of one of these games tried to prohibit item trading they were sued and, in the course of litigation discovered that the plaintiff ran a sweatshop in Mexico where workers participated in the game solely to collect salable items. Clearly as long as the wage is below $3.42 there’s an arbitrage opportunity here. More technically sophisticated arbitrageurs have replaced human workers by scripted agents, working with multiple connections. Either way, arbitrage opportunities can’t last for ever, and are likely to be resolved either by intervention or inflation
The positive economics of all this are interesting enough. But how about policy analysis? Who benefits and who loses from this kind of trade, and do the benefits outweigh the costs?
It’s pretty easy to produce a model where no-one gains and all the ‘real’ inhabitants of Norrath (that is, people playing the game for pleasure) lose. Consider a model with two groups, Norrathians who play the game for pleasure, and Terran arbitrageurs, who are good at collecting salable items, but incur disutility from the work involved in doing so. As usual in economics, assume that the two groups are homogeneous. Suppose that each individual Norrathian enjoys the game more when they have more items than others, but that a uniform increase in the stock of items makes no-one better off. Consider the starting point before the arrival of the first Terrans. Each Norrathian is willing to pay a positive sum (in Terran dollars) for items, and we’ll suppose that this is initially higher than the cost to Terrans of collecting them. So, when the first Terrans arrive, trade begins. The Terrans are better off, but the Norrathians are worse off. Since they all expand their holding of items uniformly, they gain no more pleasure from the game than before. But they are now paying the Terrans for items. The problem here is that buying an item outside the game creates a negative externality for all players.
Now, since there are profit opportunities for Terrans, more and more keep arriving. New entrants keep entering the market until the Norrath-Terra exchange rate drives the return for Terrans down to the ordinary Terran wage, at which point the entire system is in equilibrium. Terrans are no better off, and Norrathians are strictly worse off. From a social point of view, encompassing both Terra and Norrath, the work done by the Terrans in acquiring items is entirely wasted. Hence, a welfare improvement can be realised by prohibiting trade.
I think this is basically the correct story, at least in terms of mainstream neoclassical economics. But there are some counterpoints to consider. As The Economist points out, one reason people pay to get items is that the early stages of the game (the ones you play when you don’t have many items) are less interesting than the later ones. This is a design flaw and extra-game trade is a warning about this flaw. I think a Hayekian could make more of this point than I have.
A second, more neoclassical, point is that, if Norrathians are heterogeneous, there may be real gains from trade. Time-poor cash-rich players may prefer to sweep past the obstacles, using money to smooth their path, while others may be happy to defray some of their costs by selling surplus items. I’m not sure if this works (why can’t the game owner capture all these rents and lower the average entry price), but it seems like an interesting argument.
I think there are deeper issues here, relating to the conflict between the kind of market rationality displayed by the Terrans in my model and the collaborative innovation needed to create virtual worlds, but that’s a story for another post.
fn1. I haven’t looked into the actual mechanics of this. But as long as trade is allowed on Norrath, it’s hard to prevent side payments being made on Earth.