1. Economic Theory and MMOGs AGDC – September 7, 2006 Sam Lewis

2. What is this about? Summary of 2 GDC Roundtables Monetary Policy – managing the money supply Market Structure – creating a trading structure Industrial Organization – creating crafting/business relationships

3. Who Am I? Sam Lewis Currently Lead Designer Cartoon Network Senior and Lead Designer SOE Designer and Producer Kesmai BA and MBA in Economics

4. What is Economics? The study of how the forces of supply and demand allocate scare resources in a society.

5. Why Use Economics? MMOGs are Social Games Analyze Current Phenomena Make Design Decisions

6. Price Movements Thanks to Dan Speed – EVE Online

7. Natural Market Places Thanks to Ahn Sang Hoon - Seal Online

8. Final Reason “You can’t screw it up any worst than it already is.” - Gordon Walton

9. The Money Supply Objectives Sufficient cash for the economy Avoid monetary collapse New players aren’t “poor”

10. Monetary Collapse Could be Considered Fun Plan for Commodity Currency Divisible Uniform Storable Durable Compact (High Value/Weight)

11. P= MV/Q P = price level M = cash in circulation Q = quantity of goods V= the velocity of money Quantity Theory

12.  P=  MV/Q) Healthy –Holding cash maintains wealth. Hyper-inflation –Holding cash loses wealth. Depression –Holding cash increases wealth.

13. Quantity Theory P= MV/Q Control Price via Money Supply “Poor” Players via Market Prices

14. Faucets and Drains Player-to-Game Exchanges Faucet – Player selling to the game Drain – Player buying from the game

15. Faucets and Drains Players control cash creation –If they need more cash they open up the faucets Drains are fixed –They stay the same size regardless of the Price Level It will become Hyper-inflated –Its just a matter of when

16. Solutions Tie the Drain to Price Level NPC Prices rise and fall Auction Transaction Tax

17. Transaction Tax Example Two Player Economy Adventurer needs bullets to kill mobs to get cash Crafter makes bullets Crafter sets price based on demand Crafter pays both a fix offer charge and percentage sales commission

18. Transaction Tax

19. “Poor” Player Issue Because Prices Increase- Value of starting cash declines Faucet stream “too” small Can’t buy good stuff Makes new players dissatisfied

20. Solutions Non-inflationary Solutions – Have NPCs provide basics Make elder players dependant on a starting commodity or service

21. Market Structure What Market Structure should be used? Real World Economy Objective –Pareto-optimality – resources optimally allocated –Perfect Market Game World Economy Objective –Fun – players are engaged and can win –Oligopoly

22. Market Structures

23. Numerous Buyers/Sellers Homogeneity of Product Freedom of Entry and Exit Perfect Information No/Low Transaction costs Secure Transactions Infinity Divisible Goods Few Sellers, Many Buyers Substitute goods Barriers to Entry and Exit Imperfect Information Transaction costs Secure Transactions Infinity Divisible Goods Perfect Market Oligopolies

24. Few Sellers Fragment the Sellers by Location –EQ one Auction House –EQII two Auction Houses –WoW three Auction Houses –SWG one planetary commodity/many player vendors Fragment the Sellers by Time –EQ must be logged in –WoW offers for limited time period

25. Many Buyers NPC Vendor of Last Resort Consolidate the Buyers by Location –SWG commodity auction info was server wide, but you had to go and pick it up –EQII buyers view other auction info and purchase for a higher price Consolidate the Buyers by Time –Posting offers to buy

26. Substitute Goods Differentiate Goods Based on - Effectiveness Tradeoffs Esthetics/Fashion Scarcity

27. Barriers to Entry High Fixed Costs –SWG shop investment (house, tools, location) –EQ and EQII significant time investment Specialization – WoW one resource and one manufacturing skill, but need 3 or 4 to make an item. –SWG (old) max two crafting skills, but need 3 or 4 to make an item.

28. Imperfect Information In conflict with few Sellers/Many Buyers Create Arbitrage Opportunities – WoW market tracking software Future Economic Events –There players working payroll cycle

29. Transaction Cost Player’s Currency is Their Time Make it Expensive to Change Vendors – SWG - have to pick up –WoW – time to get to the other locations –Makes location based competition valid

30. Security and Division Allowing players to cheat on a deal causes more customer service problems than it is worth Making goods indivisible means getting rid of cash Play with these at the risk of destroying the business game

31. Industrial Organization Study of Industrial Structures Market Structure Manufacturing Chain Competitive Practices

32. Industrial Organization Typical MMOG Relationship Adventurers Sells Raw Materials Others Supply Sub-components Crafter creates Final Product Sells Adventurers Items

33. Industrial Structure Design Issues Manufacturing Chain Over Production Elder Dominance

34. Chain Solutions No Independent Crafters –Make sub-components –Make final products Competition on 4 Ps –Price –Product –Place –Promotion –(Predation)

35. Over Production Caused by Oligopsony Structure Advancement Independent of Manufacturing Destroy Overproducing Factories Make Items Consumable

36. Elder Dominance Caused By Natural Monopoly Structure High Fixed Costs First In Advantage Constantly Declining Marginal Costs

37. Declining Marginal Cost Cost to Produce Always Cheaper First–In Always Under-Cut

38. Overproduction Solutions Cap Quality –Elders make the same quality item Cap Cost –Elders cost the same, including wastage Use Comparative Advantage –Elders move on to supply their market

39. Conclusion Simple Economic Theory Provides Insights to Design Decisions

40. References Terra Nova –http://terranova.blogs.com Flying Scythe Monkey –http://www.flyingscythemonkey.com/ Eve Developer Blog (Dan Speed) –https://myeve.eve-online.com/ Synthetic Worlds –Edward Castronova