Virtual economy

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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.

Contents

[edit] 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.

Within the synthetic world, the following can be observed:

  1. Persistence: ­ The software maintains a record of the state of the world and the resource possessions of the players, regardless of whether or not the game is "in session" for any user.
  2. Scarcity: ­ Users must expend "real" resources such as time and money to obtain goods and/or services in the synthetic world.
  3. Specialization: ­The availability of resources to players must vary. For example, a participant may have a character who is able to produce certain goods, while other characters would have to purchase them. Because this results in comparative advantage, complex trade relationships and a division of labor result.
  4. Trade: ­ Users must be able to transfer goods and services to and from other users.
  5. Property Rights: ­ The world must record which goods and services belong to which user identity, and the code must allow that user to dispose of the good or service according to whim.

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.

[edit] Controversy: "Real" Economy Interaction

See also: Gold farming

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. These intersections with real economies remain controversial. For example, most would consider it in poor taste to offer, in a social game, another player real currency in order to play a certain way, and are viewed by gamers and game designers as spoilers. 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.

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. Some argue that to allow in-game items to have monetary values makes these games, essentially, gambling venues.

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 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. [1][2]

One of the largest virtual economies, Lineage, is based in South Korea, and claims to have four million users. The location of its online market, if it exists, is unknown. Many players question the security of such a system due to the possibility of bugs.

Some have claimed that real-economic interactions within virtual economies create a game that constitutes gambling, and that these games should be regulated as such. Others, such as The Themis Group's Richard Bartle have argued that the notion of virtual property is inherently flawed [2] since players do not "own", materially or intellectually, any part of the game world, and merely pay to use it. In fact, one of the dangers of investment in virtual property is that the game developer is free to change the game world at any time.

Furthermore, because "virtual property" is actually owned by the game developer, a developer who opposed real commerce of in-game currencies would have the right to destroy virtual goods as soon as they were listed on eBay or otherwise offered for real trade. A good example of this would be Final Fantasy XI, where a task force was set up to delete characters involved in selling in-game currency for real-world money.[3]

[edit] 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 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 - A far cry from the days when players would trade amongst themselves and over eBay.

[edit] Price Comparison and other Tools

Tools for the comparison of this secondary market have recently become more numerous. Eye On MOGS, was the first site to tackle comparison of virtual currency sellers. Another notable entry was GamerPrice, which deployed bots offering real-time price results.[4].

Others include 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[citation needed] 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[citation needed] of interacting with these markets.

[edit] 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."[5] 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."[6] 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"[7].

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.[8]

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 that "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." For these MMOG developers to make the case these rewards had no monetary value, they'd be required to demonstrate enforcement of their Terms of Service against 'unofficial secondary markets', thus to removing any monetary value from their rewards in their games.[9]

[edit] Virtual Crime

Main article: 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. [10][11]

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" [12].

[edit] The online black market

Many MMORPGS such as RuneScape or World of Warcraft 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.

[edit] Economy stability

Main article: Mudflation

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[citation needed]. Mudflation is a common problem in virtual economies.

[edit] 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).

[edit] 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.

[edit] Virtual Rights

Property rights in the virtual world are governed by the same legal concepts as in the bricks and mortar universe; they exist by contract or by common law. The protection of "virtual rights" is an emerging area of the law, with little to guide lawyers and judges.[13]

[edit] References

  1. ^ http://news.bbc.co.uk/1/hi/technology/4385048.stm
  2. ^ http://news.bbc.co.uk/1/hi/sci/tech/4421496.stm
  3. ^ http://www.playonline.com/pcd/topics/ff11us/detail/1013/detail.html
  4. ^ http://toolbar.netcraft.com/site_report?url=http://www.gamerprice.com
  5. ^ http://www.techdirt.com/articles/20061017/163943.shtml
  6. ^ http://legalblogwatch.typepad.com/legal_blog_watch/2007/10/for-friday-virt.html
  7. ^ http://virtuallyblind.com/2007/10/23/tax-virtual-profits-in-world/
  8. ^ http://www.virtualworldsnews.com/2007/07/follow-up-on-uk.html
  9. ^ http://www.virtualworldsnews.com/2007/07/follow-up-on-uk.html
  10. ^ http://www.freep.com/news/mich/sims27_20040127.htm
  11. ^ http://www.alphavilleherald.com/archives/000049.html
  12. ^ http://www.zdnetasia.com/news/internet/0,39044908,62030702,00.htm
  13. ^ Joseph D. Schleimer, Legal Problems in Protecting the "Virtual Rights" of Living and Deceased Actors, Entertainment Law & Finance, December 2000 [[1]]

[edit] External links

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