Virtual World, Virtual Economy

People play games to enjoy themselves. They play in a virtual world, and part of playing in that virtual world is the assumed rule that a gamer can never lose money in the virtual world. It makes sense from a certain angle, because after all, you’re playing a video game, right?

In the real world, a country’s economy has a specific number of dollars in it. People trade goods and services for that currency each day. " Each country’s government controls and regulates their currency heavily.

It follows that things like printing more money then, bring more physical money into that government’s economy. However, printing more money usually doesn’t solve many problems and often leads to inflation. To stabilize a dollar’s value, or bring down inflation, requires you to either increase the money sinks or decrease the money sources.

Theoretically, this is the way it’s supposed to work in the virtual world. Although there are certain parallels that can be drawn, the number of differences between a virtual world and the real world is large.

In the World of Warcraft, when you are adventuring out in Azeroth, while leveling, you pick up "gray" and "white" "vendor trash" items that you can take to a vendor and sell them for coppers, silvers, or gold, bringing money into the economy. You then take that money and send it back out of the economy in the form of class skills, vendor (as opposed to gear from an Auction House) gear for your character, trade skills, mounts, regents, repair costs, and bank slots.

Sometimes you need potions, trade skill materials, and better gear that you wouldn’t find at a vendor, so you either go out and kill X number of certain kinds of monsters and collect X number of specific items to get what you want, or you visit the Auction House to purchase it from another player with your in-game money. However, Auction House transactions don’t affect the economy as a whole because they don’t change the amount of money in the economy.

WoW has some measures currently built in to help control the economy. First is probably the biggest, and that is the BOP v BOE item designation. Some items are BOP, or Bind on Pickup, which can be picked up one time and never traded. Once this kind of item is picked up by one person, it is 'binded' to them. That one person cannot go out and sell that piece of gear to another person when he is finished with it. He can sell it to a vendor, but the BOP designation ensures the gear leaves the economy once he is finished with it.

Some items are BOE, or Bind on Equip, and that type of item can either be traded or equipped, but not both. However, once it is equipped by a person, it becomes “soulbound” (binded to them) and that person cannot go out and sell the piece to another player after equipping it. They can destroy it or they can sell it to a vendor, but once equipped, that gear has to leave the economy either way.

It goes in this manner for the most part until you hit 60. While you’re leveling, you usually have just enough money to buy your skills, your mount, increase your trade skill points, and buy things you want occasionally. When you hit 60, though, it becomes a different story. You don’t have the regular class skill gold sinks, and the 728g you need for an epic (the best) mount is a one time sink.

Blizzard doesn't control the number of a particular item you sell to the vendor. In Warcraft, you and any number of players could sell 100 'long broadswords' to a vendor, and he would just take them for the same price infinitely. The rules of supply and demand don't apply here. So a player goes out, farms mobs for whatever he needs, sells the "vendor trash" and makes gold while doing it. The gold he makes while doing so is brought into the economy. He builds up immense amounts of wealth doing just this and really has nothing to sink the money into. This money never leaves the economy, and this is how inflation in virtual economies increases.

Although this is changing with newer MMOs such as Second Life, many others like World of Warcraft don’t regulate their currency. So the number of currency, in this case gold, in circulation in the economy is mainly dependent on a server’s length of life and the number of people who play on that server, among other things.

The effect of Real World Money on a Virtual Economy
Another contributing factor to virtual economy inflation is real world money. Type ‘WoW gold’ in a Google search, and see how many gold-selling companies come up. You will see hundreds. This happens with any virtual economy that doesn’t regulate their currency. For example, many people in real life sell gold for World of Warcraft on both eBay and on their own private websites. This isn’t against the EULA, and since WoW’s currency isn’t regulated, it goes on to no end. Companies that sell WoW gold can go out and bring infinite amounts of currency into the economy without any consequence. To a certain extent, this also drives up inflation in a virtual economy. More money within the economy doesn’t mean the value of a particular product has changed, it means the price probably did.

Illidan is one of the oldest servers Blizzard runs for the World of Warcraft. Demon Soul is also a PvP server, although it is much, much newer. The cost of a stack of 20 plaguebloom (a high-end flower used in certain potions) on Illidan is 20 gold. On a newer server like Demon Soul, the cost of that same stack may be only 10 gold. This is because there simply just isn’t the same amount of gold within the entire Demon Soul economy as there is within the entire Illidan economy.

Although there is a big risk in opening one, and many gold-selling companies have gone out of business, it doesn’t stop a few from being very successful. Since Blizzard doesn’t regulate their currency, Blizzard has no way of knowing how much money is in a server’s economy at any given time. To go a step further, since they don’t know how much money is in circulation, they can’t control it, nor can they tell what’s been purchased and what’s been produced in-game.

Companies that sell gold, then, have no recourse when a player accuses them of fraud. Since the currency isn’t tracked, there is no way to tell whether a company actually sold a player 1000 gold, or whether they stiffed the player. Many, many smaller gold-selling companies go out of business solely because of this problem. A player can purchase 1000 gold from Company A, then go to his Paypal, Visa, MasterCard, or other credit card company, and say the purchase never happened. Company A has no way to prove whether the transaction was valid or not, so they lose the sale and the gold they gave the player. Small companies who try their hand at this find themselves hard pressed to cover the huge losses that amount from this. It’s the reason why the big guys have succeeded at this and the little guys don’t – because big companies can absorb the losses without even a blink.

Game Developers Counter Economy Instability

Many MMO players and developers alike say that the downfall of an MMO is always its economy. So far, only a few have managed to figure out how to either decrease the sources or increase the sinks to keep a game’s economy stable. Games like Second Life are different than games like World of Warcraft. They know exactly how much currency is in circulation in their economy at all times, and they have cut eBay and gold-farming companies out of the loop by offering currency sales themselves. The real world price of a "Linden Dollar (currency used in Second Life)” fluctuates from day to day. People making real world money in Second Life sell virtual property, services, and goods for Linden Dollars, upon which they can trade those "Linden Dollars in for real-world cash. The difference between Second Life and other games is that a seller in Second Life can prove the sale – so the fraud risk is gone.

Update:
It seems, though, that Blizzard is working to combat the inflation problem on their servers with the release of the expansion pack, the Burning Crusade. Among all the new items, zones, and other content offered in it, one new item offered in the expansion pack is an epic flying mount, (private/personal transportation around certain zones of the world, such as a gryphon or a wyvern) which after training and actual mount purchase, costs 5900-6000 gold, depending on mount speed. In theory, this should curb inflation greatly since the amount of money you need to purchase one is so high, but whether that will actually curb inflation remains to be seen.

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