Virtual economy

A virtual economy (or sometimes synthetic economy) is an emergent economy existing in a virtual persistent world, usually in the context of an Internet game. People enter these virtual economies recreationally rather than by necessity; however, some people do interact with them for "real" economic benefit.

Overview

Virtual economies are observed in MUDs and massively multi player online role-playing games (MMORPGs). The largest virtual economies are currently found in MMORPGs. Virtual economies also exist in life simulation games which may have taken the most radical steps toward linking a virtual economy with the real world. This can be seen, for example, in Second Life's recognisation of intellectual property rights for assets created "in-world" by subscribers, and its laissez-faire policy on the buying and selling of Linden Dollars (the world's official currency) for real money on third party websites. Virtual economies can also exist in browser-based internet games where "real" money can be spent and user-created shops opened, or as a kind of Emergent gameplay.

Virtual property can refer to any resource that is controlled by the powers-that-be, which includes virtual objects as well as avatars or user accounts in their entirety. The following characteristics are commonly found in virtual property. Note however that it is possible for virtual property to lack one or more of these characteristics, and they should be interpreted with reasonable flexibility. [cite web |url=http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962905 |title=The Five Indicia of Virtual Property |accessdate=2008-05-02 |author=Charles Blazer |date=2006 |work=Pierce Law Review Vol. 5 ]
# Rivalry: ­Possession of property is limited to one person or a small number of persons.
# Persistence: ­Possession is maintained even when the property is not in use. Users expect property to remain in their possession between sessions.
# Interconnectivity: ­Property may affect or be affected by other people and other property. The value of property varies according to a person's ability to use it for creating or experiencing some effect.
# Secondary markets: Virtual property may be created, traded, bought, and sold. Real assets (typically money) may be at stake.
# Value added by users: Users may enhance the value of virtual property by customizing and improving upon the property.

The existence of these conditions create an economic system with properties similar to those seen in contemporary economies. Therefore, economic theory can often be used to study these virtual worlds.

Within the virtual worlds they inhabit, synthetic economies allow in-game items to be priced according to supply and demand rather than by the developer's estimate of the item's utility. These emergent economies are considered by most players to be an asset of the game, giving an extra dimension of reality to play. In classical synthetic economies, these goods were charged only for in-game currencies. These currencies are often sold for real world profit.

A Massive Market Place

The release of Blizzards' World of Warcraft in 2004 and its subsequent huge success across the globe has forced both MMORPG and their secondary markets into mainstream consciousness, and many new market places have opened up during this time. A quick search for [http://www.google.co.uk/search?sourceid=navclient&ie=UTF-8&rls=GGLD,GGLD:2004-11,GGLD:en&q=wow+gold WoW Gold on Google] will show a multitude of sites (90+ sponsored results at this time, June 2006)(22,000,000 sponsored results as of April 25, 2007) from which Gold can be purchased. Real money commerce in a virtual market has grown to become a multi billion dollar industry. Industry insiders like Steve Sayler of "Internet Gaming Entertainment Ltd (IGE)" founded a company that offered not only the virtual commodities in exchange for real money but also provided professional customer service. "IGE" had a trained staff that would handle financial issues, customer inquiries and technical support to ensure that gamers are satisfied with each real money purchase. It also took advantage of the global reach of synthetic worlds by setting up a shop in Hong Kong where a small army of technically savvy but low wage workers could field orders, load up avatars, retrieve store goods and deliver them wherever necessary. [Edward Castronova, Synthetic Worlds: The Business and Culture of Online Games (Chicago, The University of Chicago Press, 2005), 164.] This lucrative market has opened a whole new type of economy where the border between the real and the virtual is obscure.

Hundreds of companies are enormously successful in this new found market, with some virtual items being sold for hundreds or even thousands of dollars. Virtual real estate is earning real world money, with people like 43-year old "Wonder Bread" deliveryman, [http://www.wired.com/wired/archive/11.01/gaming.html John Dugger] , purchasing a virtual real estate for $750, setting him back more than a weeks wages. This virtual property includes nine rooms, three stories, rooftop patio, wall of solid stonework in a prime location, nestled at the foot of a quiet coastal hillside. Dugger represents a group of gamers that are not in the market for a real house but instead to own a small piece of the vast computer database that was Britannia, the mythical world in which the venerable MMO Ultima Online unfolds. Such trading of real money for virtual goods simply represents the development of virtual economies where people come together where the real and the synthetic worlds are meeting within an economic sphere. [Musgrove, Mike. "Virtual Games Create a Real World Market." Washington Post. 17 Sep. 2005 ]

Although virtual markets may represent a growth area, it is unclear to what extent they can scale to supporting large numbers of businesses, due to the inherent substitutability of goods on these markets plus the lack of factors such as location to dispense demand. In spite of numerous famed examples of the economic growth of Second Life an amateur analyst in 2008 estimated the income inequity in Second Life's economy as worse than has ever been recorded in any real economy: a Gini coefficient of 90.2, a Hoover index of 77.8, and a Theil index of 91%. However, it is not clear if application of these real measures is appropriate to a virtual world where (for example) income is not necessary to survive.

Price Comparison and other Tools

Tools for the comparison of this secondary market have recently become more numerous. This has occurred as a response to alleviate the labor involved in leveling that requires hours, days or weeks to achieve. Being able to exchange real money for virtual currency provides the player purchasing power for virtual commodities. As such, players are guaranteed opportunities, increased skills and a fine reputation, which is a definite advantage over others.

Eye On MOGS was the first site to tackle comparison of virtual currency sellers. They offer the opportunity to convert real life earnings into virtual gold, platinum, ISK or Credits, depending on one's inhabited virtual world. [ [http://www.eyeonmogs.com/index.php Eye On MOGS - Find cheap WOW Gold, World of Warcraft Gold, FFXI Gil, Final Fantasy XI Gil, Lineage 2 Adena, Everquest Plat, EQ2 Gold, Ragnarok Zeny ] ] Another notable entry was GamerPrice, which deployed bots offering real-time price results. [ [http://toolbar.netcraft.com/site_report?url=http://www.gamerprice.com Site report for www.gamerprice.com ] ]

Others include Gilfinder.com, BuddyPlayer, Gold Price Watcher, GameUSD and WoW Gold Seeker.

As MMORPGs continue to grow in popularity and the secondary markets grow with them (some industry experts Fact|date=November 2007 have suggested that secondary market sales may total more than subscription sales by 2009), services like those above are likely to become less curiosities and more accepted means Fact|date=November 2007 of interacting with these markets.

Taxation of Virtual Economies & Regulation via On-line Gambling Legislation

Income from sale of virtual items is being considered as real revenue as players in such games have ascribed a real-world value onto them: "By taking any aspect of the game and connecting it directly to the real world, the games have only brought this possibility on themselves." [ [http://www.techdirt.com/articles/20061017/163943.shtml Techdirt: Nice Work Retrieving That Magic Sword... But Now You Need To Pay Uncle Sam For It ] ] And as that ascribed value is being increasingly converted into to real dollars, attention is now being given by those in taxation law and in governments.

Commentators in taxation law speculate "that profits made in virtual worlds could be taxable even before they are withdrawn as dollars." [ [http://legalblogwatch.typepad.com/legal_blog_watch/2007/10/for-friday-virt.html Legal Blog Watch ] ] The speculation seems to based on the observation that, as one commentator said, "the easier it is to buy real goods with virtual currency (e.g. order a real life pizza) the more likely the IRS will see exclusively in-world profits as taxable." [ [http://virtuallyblind.com/2007/10/23/tax-virtual-profits-in-world/ Two Experts Suggest Virtual World Profits May Be Taxable Even Before Conversion to Real World Cash | Virtually Blind | Virtual Law ] ]

This conversion has led to direct comparisons with other on-line "games of chance" as 'virtual winnings'. Once converted into real currencies these 'winnings' have been measurable for some time in real terms. This is why gamers and companies engaged in this conversion, where it is allowed under license from developers, are now being encouraged to apply for licenses under EU legislation:

Now we’ve spoken with the gambling commission, and they’ve said that MMOGs aren’t the reason for the act, but they won’t say outright, and we’ve asked directly, that they won’t be covered. You can see how these would be ignored at first, but very soon they could be in trouble. It’s a risk, but a very easy risk to avoid.cite web|url=http://www.virtualworldsnews.com/2007/07/follow-up-on-uk.html |publisher=Virtual Worlds News |title=UK Gambling Act: How to Protect Your Virtual World]

During an interview with Virtual World News, a representative of the British law firm Campbell Hooper stated that, "In the US there seems to be a general blanket ban on gambling. There doesn’t seem to be that ban on skill gaming." However, in the EU, skill gaming does fall under the definition of gambling. Compliance in the EU though will likely only require MMOGs "to do what’s fair and reasonable in that situation."

When queried about games where there is an 'unofficial secondary market', the representative responded: "Ultimately the point is whether the thing that you win has value in money or money’s worth. If it does have value, it could be gambling." So to avoid regulation by these laws, the "operator would need to take reasonable steps to ensure that the rewards they give do not have a monetary value [,] " possibly by demonstrating enforcement of their Terms of Service user agreement prohibiting 'unofficial secondary markets'.

Virtual Crime

Monetary issues can give a virtual world problems similar to those in the real world. In South Korea, where the number of computer game players is massive, some have reported the emergence of gangs and mafia, where powerful players would threaten beginners to give money for their "protection", and actually steal and rob.

Other similar problems arise in other virtual economies. In the game "The Sims Online", a 17-year old boy going by the in-game name "Evangeline" was discovered to have built a cyber-brothel, where customers would pay sim-money for minutes of cybersex. Maxis canceled each of his accounts, but had he deposited his fortune in the gaming open market he would have been able to keep a part of it. [http://www.freep.com/news/mich/sims27_20040127.htm] [ [http://www.alphavilleherald.com/archives/000049.html Second Life Herald: Evangeline: Interview with a Child cyber-Prostitute in TSO ] ]

A recent virtual heist has led to calls from some community members in Second Life to bring in external regulation of these markets: "In late July, a perpetrator with privileged information hacked into a stock exchange's computers, made false deposits, then ran off with what appears to be the equivalent of US$10,000, disappearing into thin air. Despite the seemingly small haul, this heist left investors feeling outraged and vulnerable." [ [http://www.zdnetasia.com/news/internet/0,39044908,62030702,00.htm Virtual exchanges get real : News : Internet - ZDNet Asia ] ]

The online black market

Many MMORPGS such as RuneScape, World of Warcraft or Final Fantasy XI strictly prohibit buying gold, items, or any other product linked with the game, with real world cash. RuneScape went as far as making it virtually impossible by removing Unbalanced Trades. Final Fantasy XI has entire task forces dedicated to the removal of real money trading from the game.

Economy stability

For a persistent world to maintain a stable economy, a balance must be struck between currency sources and sinks. Generally, games possess numerous sources of new currency for players to earn. However, some possess no effective "sinks", or methods of removing currency from circulation. If other factors remain constant, greater currency supply weakens the buying power of a given amount; a process known as inflation. In practice, this results in constantly rising prices for traded commodities. With the proper balance of growth in player base, currency sources, and sinks, a virtual economy could remain stable indefinitely.

As in the real world, actions by players can destabilize the economy. Gold farming creates currency within the game more rapidly than usual, exacerbating inflation. In extreme cases, a hacker may be able to hack into the system and create a large amount of money. This could result in hyperinflation.

While the Federal Reserve Bank usually manages to adjust interest rates to slow inflation of the U.S. Dollar, game operators have found this balance very difficult to maintain. Mudflation is a common problem in virtual economies.

Capital in Virtual Economies

In these virtual economies, the value of in-game resources is frequently tied to the in-game power they confer upon the owner. This power allows the user, usually, to acquire more rare and valuable items. In this regard, in-game resources are not just tradable objects but can play the role of "capital".

Players also acquire human capital as they become more powerful. Powerful guilds often recruit powerful players so that player can acquire better items which can only be acquired by the cooperation among many players (sometimes to the hundreds).

Other Virtual Economies

Virtual economies have also been said to exist in the "metagame" worlds of live-action role-playing games and collectible card games.

Controversy: "Real" Economy Interaction

A game's synthetic economy often results in interaction with a "real" economy; characters, spells, and items may be sold on online auction websites like eBay for real money. While many game developers, such as Blizzard (creator of "World of Warcraft"), prohibit the practice, it is common that goods and services within virtual economies will be sold on online auction sites and traded for real currencies.

According to standard conceptions of economic value (see the subjective theory of value), the goods and services of virtual economies do have a demonstrable value. Since players of these games are willing to substitute real economic resources of time and money (monthly fees) in exchange for these resources, by definition they have demonstrated utility to the user.

Some virtual world developers officially sell virtual items and currency for real-world money. For example, the MMOG "There" has therebucks that sell for US dollars. The currency in "Second Life" can be converted from Linden Dollars into US Dollars and vice versa. Rates fluctuate based on supply and demand, but over the last few years they have remained fairly stable at around 265 Linden Dollars (L$) to the US Dollar. The currency in "Entropia Universe", Project Entropia Dollars (PED), could be bought and redeemed for real-world money at a rate of 10 PED for U.S.$ 1. On December 14, 2004, an island in "Project Entropia" sold for U.S. $26,500 (£13,700). One gamer also purchased a virtual space station for U.S. $100,000 (£56,200) and plans to use it as a virtual nightclub. [ [http://news.bbc.co.uk/1/hi/technology/4385048.stm BBC NEWS | Technology | Virtual club to rock pop culture ] ] [ [http://news.bbc.co.uk/1/hi/sci/tech/4421496.stm BBC NEWS | Technology | Virtual property market booming ] ]

Many Korean virtual worlds (such as Flyff) and other worlds outside that country (such as Archlord and Achaea, Dreams of Divine Lands) operate entirely by selling items to players for real money. Such items generally cannot be transferred and are often used only as a means to represent a Premium subscription via a method which is easily integrated into the game engine.

These intersections with real economies remain controversial. Markets that capitalize in gaming are not widely accepted by the gaming industry. Reasons for this controversy are varied. Firstly, the developers of the games often consider themselves as trying to present a fantasy experience, so the involvement of real world transactions takes away from it. Further, in most games, it would be unacceptable to offer another player real currency in order to have them play a certain way (eg, in a game of Monopoly between friends, offering another player a real dollar in exchange for a property on the board); and for this to be necessary or valuable may indicate a Kingmaker scenario within the game. However, such rules of etiquette need not apply, and in practice they often don't, to massive game worlds with thousands of players who know one another only through the game system.

Further and more involved issues revolve around the issue of how (or if) real-money trading subjects the virtual economy to laws relating to the real economy. Some argue that to allow in-game items to have monetary values makes these games, essentially, gambling venues, which would be subject to legal regulation as such. Another issue is the impact of taxation that may apply if in-game items are seen as having real value. If (for example) a magic sword is considered to have real-world value, a player who kills a powerful monster to earn such a sword could find himself being charged tax on the value of the sword, as would be normal for a "prize winning". This would make it impossible for any player of the game "not" to participate in real-money trading.

A third issue is the involvement of the world's developer or maintenance staff in such transactions. Since a developer may change the virtual world any time, ban a player, delete items, or even simply take the world down never to return, the issue of their responsibility in the case where real money investments are lost through items being lost or becoming inaccessible is significant. Richard Bartle argued that this aspect negates the whole idea of ownership in virtual worlds [http://www.themis-group.com/uploads/Pitfalls%20of%20Virtual%20Property.pdf] , and thus in the absence of real ownership no real trade may occur. Some developers have acted deliberately to delete items that have been traded for money, as in Final Fantasy XI, where a task force was set up to delete characters involved in selling in-game currency for real-world money. [ [http://www.playonline.com/pcd/topics/ff11us/detail/1013/detail.html FINAL FANTASY XI Official Web Site ] ]

However, Second Life has shown a legal example which may indicate that the developer can be in part held responsible for such losses. Second Life at one stage, offered and advertised the ability to "own virtual land", which was purchased for real money. In 2007, Marc Bragg, an attorney, was banned from Second Life; in response he sued the developers for thereby depriving him of his land, which he - based on the developers' own statements - "owned". The lawsuit ended with a settlement in which Bragg was re-admitted to Second Life. The details of the final settlement were not released, but the word "own" was removed from all advertising as a result. (It should be noted that Bragg purchased his land directly from the developers, and thus they were not an uninvolved third party in his transactions.)

ee also

* Simulated reality
* Social simulation
* Virtual reality

References

External links

** [http://virtual-economy.org/bibliography Virtual Economy Research Network bibliography] - a comprehensive bibliography of publications related to virtual economy
* Castronova, Edward. "Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier," [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=294828 "CESifo Working Paper No. 618"] , December 2001.
* Castronova, Edward. "On Virtual Economies," [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=338500 "CESifo Working Paper Series No. 752"] , July 2002.
* Castronova, Edward. "The Price of 'Man' and 'Woman': A Hedonic Pricing Model of Avatar Attributes in a Synthethic World," [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=415043 "CESifo Working Paper Series No. 957"] , June 2003.
* Dr. Richard A. Bartle - [http://www.themis-group.com/uploads/Pitfalls%20of%20Virtual%20Property.pdf Pitfalls of Virtual Property] - A philosophical case against the concept of "virtual property" ownership.
* [http://www.economist.com/displaystory.cfm?story_id=S%27%29%288%2BQ%21%5F%2B%23%40%22%5C%0A&tranMode=none Virtual Economies] The Economist, Jan 2005, (subscription)
* Zonk (Slashdot). "Virtual Island Sells For $26,500". [http://games.slashdot.org/article.pl?sid=04/12/14/1759253&from=rss] 14 December 2004.
* [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=807966 Fairfield, Joshua, "Virtual Property"] . Boston University Law Review, Vol. 85, 2005
* [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=987056 Internet Gambling Regulation Present and Future] - Mark Methenitis' Essay for Texas Tech University School of Law detailing internet gambling and economies within MMORPG's and the problems that will be faced in the future.
* [http://www.raphkoster.com/gaming/lewisagc2006.ppt Economic Theory and MMOGs] - Powerpoint presentation by Sam Lewis, a designer working with SOE, on the interaction between economic theory and MMO design.
* [http://www.gamerprice.com/wow-gold-study.html World of Warcraft Gold Study] detailing effects of real money trade on the European and American realms. Includes realm by realm statistics.
* [http://www.techcrunch.com/2007/06/20/virtual-goods-the-next-big-business-model/ Virtual Goods: the next big business model] by Susan Wu
* Lastowka, Greg and Hunter, Dan. "The Laws of the Virtual Worlds," [http://ssrn.com/abstract=402860 California Law Review]
* Yoon, Ung-Gi. "Real Money Trading in MMORPG items from a Legal and Policy Perspective", [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1113327 South Korean Judge's thought on RMT in virtual world]