Key Points from "Virtual Economies: Design and Analysis"
Highly recommended for anyone who works on game economies
I’m the Game Product Lead working on Axie Infinity, with previous experience in product and marketing at Pokémon GO, Figure 1, Rakuten Kobo, and Facebook. (Twitter | LinkedIn)
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I was recently recommended the book Virtual Economies: Design and Analysis and it did not disappoint. Lots of great insights, reminders, definitions, and frameworks to help design game economies. Here are some points I noted while reading it:
Goals
Goal of virtual economies from a publisher POV
Providing content that engages players
Attract and retain users
Generate revenue
Governments try to make real-world economies as efficient as possible. Game developers try to make economies meet their goals (mentioned above), which may involve intentionally creating less efficient markets and economies.
Content
The measure of “content” in games is experiences. As players experience new content it is consumed as it loses its novelty. Reintroducing old content with tweaked and scaled-up values will not restore more than a small part of its novelty value.
Content is one of the few naturally scarce resources in a virtual economy.
Human Behaviour
Managing resources, trading, and other economic activities have been key for human survival. Economy games are fun because they allow us to practice these heuristics in circumstances that are safe.
Goods
Excludable vs Non-Excludable
Excludable: Possible to prevent people from using it
Non-Excludable: Not possible to prevent people from using it
Rivalrous vs Non-Rivalrous
Rivalrous: One person’s use of the good diminishes others’ ability to do so
Non-Rivalrous: Multiple people can use the same good without loss of value
Rivalrousness and Excludability are closely connected with creating scarcity for Goods.
Three key areas of utility for goods:
Social markers
Personal and emotional significance
Solving basic needs and problems
Supply and Demand
Spending time on collecting resources in-game have an increasing marginal cost for players. The more time a player spends, the more valuable each minute of their remaining time becomes. Cost of adding one minute of play is low to zero, however if they’re adding hours more a day, they are now sacrificing important opportunities in their life (e.g. work, sleep, socializing).
Consequence: If there is an open-market that demands more supply of a resource from players who collect them (suppliers), the market must pay more per item to account for the increasing marginal cost of the suppliers.
If you want to design for economic and social interaction as “content”, then you might want to make it harder for people to supply everything for themselves or increase the returns on specialization.
Economically minded players feel that seeking out and exploiting arbitrage opportunities is a lot of fun. Arbitrage opportunities are a type of economic game content.
Conditions for a competitive market:
Numbers: There are lots of buyers and sellers
Specialization: People want and possess different things
Free Entry: Number of suppliers and consumers is not restricted
Homogeneity: Goods being traded are mutually interchangeable
Method of Exchange: There is a cheap and easy way to conduct exchange
Regulating Markets
Publisher objectives are often best pursued through unfree rather than free markets
The goal of games is not to replicate real world free markets. It is to create regulated markets where everyone has fun and feels progression.
Basic Market Structures:
Definitions:
Monopsony: a market situation in which there is only one buyer
Monopoly: a market situation in which there is only one seller
Secondary markets result in some consumers buying “used” instead of “new” which cannibalizes primary sales, BUT it also results in some consumers buying new who otherwise would not have bought anything at all.
Condition to purchase changes from:
No secondary market - Price of good < Value of Content
to: With secondary market - Price of good < Value of Content + Resale Price
The primary sale purchase of a new item becomes attractive to a larger number of consumers or at a higher price, or both.
From a pure revenue perspective, the choice between implementing a secondary market depends on if the increase in primary market sales will be more than it cannibalizes them.
Cannibalization can be reduced through various tactics including blocking secondary market sales of new items for a certain period of time so if players want it sooner, they have to purchase it new. The longer the delay, the less cannibalization will happen.
Not all items should have a market and be tradable. The decision to have a market for any given item should go back to if it supports the publishers’ goals (Engaging Content, Attract/Retain, Monetize).
In the case of World of Warcraft items -
Common goods should be tradable as the positive player-to-player interactions is engaging content, and the negatives are minimal because they’re easy to produce and carry little value in signaling.
Rarer items that are more difficult to obtain and carry significant signaling value should not be tradable as it would cause them to lose all of that signaling value. It would also shorten the progression and goals (content) that players must work towards in obtaining these.
Market Power and Pricing
Two types of switching costs highlighted -
Social Networks: More users in a game makes the game experience better. Moving to a smaller game would cause a drop in value.
Virtual Assets: Switching to a competing experience entails losing all of one’s virtual assets accumulated in the old platform.
If a market emerges where users can liquidate their assets into more portable assets such as money, then virtual assets cease to act as a switching cost.
Setting prices for virtual goods should involve benchmarking against both competitor revenues (total amount players are willing to spend) and price tags (amount players are willing to spend on certain individual assets).
Price Elasticity of Demand (PED): “If price increases by 1%, by how many % will the quantity demanded decrease in response?”.
To optimize revenue, if:
> 1, decrease price
= 1, do nothing
< 1, increase price
PED determined by:
Looking at how people have reacted to price changes in past sales data
Asking customers / beta testers what their reactions would be to different price levels
Conducting pricing experiments directly in the experience
Price discrimination: Charging different prices from different consumers
Maximize the revenue based on different consumers’ individual willingness to pay
Ethical and consumer backlash issues to manage
To avoid consumer backlash, retailers use personalized discount coupons instead of meddling directly with price tags.
Categories:
Group discrimination: Dividing consumers into groups based on some convenient variable (e.g. country) that is likely correlated with their willingness to pay.
Consumer self-selection: Provide several differently priced versions of the product and let consumers select the one that best corresponds with their willingness to pay. (e.g. no-frills version for thrifty consumer, middle-class version for more affluent consumer, luxury version for rich consumer)
Affluent consumers have more money than time and poor consumers more time than money.
To discriminate, a publisher could offer the same product using two different methods - one which requires the consumer to spend a lot of time but little money, and the other which requires little time but a lot of money.
Methods of Exchange
Ten exchange mechanisms:
Personal trade: Two persons meet, negotiate, and trade.
Escrow: Two persons execute a trade by using a trusted third party as an intermediary.
Fair: Many individuals meet at a fixed location to negotiate and trade
Silent Fair: A Fair where buy/sell offers are listed in a central registry to facilitate finding a buyer or seller.
Bazaar: Professional merchants buy and sell goods at fixed location; prices are negotiable.
Retail Store: Professional merchant offers goods for sale at fixed prices at fixed location.
Auction: Seller announces item for sale; buyers announce their bids.
Auction House: Sellers list goods for s ale in a central registry; buyers bid for them through the registry; highest bid wins.
Buyout House: Sellers list sell offers in a registry at fixed prices; buyers make deals through the registry.
Bourse: Sellers list sell offers; buyers list buy offers; deals are conducted through the registry (e.g. stock exchange).
World of Warcraft has designed their auction houses to be less efficient and monetize that inefficiency.
High-volume trading requires lots of running between the Auction House, a Mailbox, and a Bank, which are all situated apart. Blizzard offers a mobile smart phone client that allows players to bypass all of these limitations and access the auctions from anywhere, but this is only accessible via an additional monthly subscription fee.
Users who consume content slowly pay less; users who rush through the game faster must pay more per time unit.
Some basic exchange mechanisms in order of increasing efficiency and decreasing engagement
Externalities and Secondary Market Trade
Market Failure: Situation where individuals’ pursuit of self-interest leads to an inefficient outcome from a societal point of view.
Positive Externality driven: Someone paints their house and neighbors benefit due to increase property value as the neighborhood looks more attractive. These benefits are not reflected in the cost of the paint which the homeowner alone pays. Therefore, the homeowner will paint their house less often than would be optimal for the entire neighborhood.
Negative Externality driven: Factory owners need to pay for land, labor, and raw materials but not for the polluted air. That cost is borne by everyone else in illnesses, climate change, lower agricultural output etc. Therefore, a larger quantity of the product is produced and sold at a lower price than what would be socially optimal.
Possible responses to the negative external effects of individual behaviour
Institutions and Non-market Allocation
Institution: Persistent social pattern that is emergent and self-enforcing (e.g. driving on a certain side of the road, constitution of the united states)
Institutions require trust to emerge, which is created by:
Meta-institutions like morals and reputation.
Morals: Standard of behaviour that are considered acceptable in a culture.
Reputation: Track record of past behaviour used to predict a person’s future behaviour.
Formal institutions for enforcing moral behaviour and holding people to their promises - Justice Systems.
Institutions naturally exist and may allocate resources, provide social systems, facilitate exchange, and many other services. All of these can help drive core publisher goals.
Institution of Gifting can be a powerful force. Sometimes it is motivated by “pure altruism” and sometimes “as an exchange”.
E.g. If one takes care of a child:
Pure Altruism: Paternal love
As an Exchange: Child will take care of parent in old change
Paying someone for a contribution they have given altruistically can crowd out the altruistic motivation, which can lead them to contribute less, not more (e.g. Blood Donation).
Crime in games can be fun (e.g. pirates who steal goods in EVE online) or frustrating (e.g. getting account hacked and stolen). Risk is enjoyable and addictive only if it satisfies the following criteria:
Users feel in control of when they expose themselves to risk
Random misfortunes are not exciting
The feeling of danger when entering a low-security area is exciting
Users feel in control of how much risk they expose themselves to
Some players are more or less wealthy and risk averse. They can adjust their actions to manage risk levels.
Higher risk comes with a higher potential payoff
Exciting to take a risk and potentially get handsomely rewarded for it
Money
Three uses of money:
Medium of exchange
Store of value
Unit of account
Attributes of good money:
Valuable, Fungible, Divisible, Verifiably countable, Recognizable, Durable, Constant value, Easy to transport, Inexpensive to store, Theft resistant, Counterfeit resistant, Private, Flauntable, Accountable
Types of money:
Commodity: Useful for something else besides exchange (e.g. Gold and Silver, Rice, Squirrel Pelts)
Representative: Valuable thanks to representing a claim to something valuable (e.g. Receipts of grain store in royal warehouse, Gold certificates representing gold stored with government)
Fiat: Valuable thanks to being generally accepted as payments for goods or services, because of degree or convention (e.g. US dollar)
Token: Valuable thanks to someone pledging to redeem it for something of value (e.g. Amazon Gift Card, Casino chips, Arcade tokens)
Currency Area: Area in which a given currency is accepted as a means of payment. Total set of different goods and services payable with the currency. (USD has large currency area, WoW gold coins have small currency area).
Virtual money generally has much smaller currency areas than Real money.
Macroeconomic Design
Faucets for goods from gameplay can be adjusted in three ways;
Increase difficulty of gameplay actions
Reduce how often players have the opportunity to carry out the action
Reduce likelihood of the action yielding rewards via the loot table
User-Generated content can also be a faucet for goods. They can be a direct faucet (e.g. anything made can instantly be sold and traded) or be a throttled faucet by the publisher (e.g. anything made has to be approved by publisher before it start appearing through certain faucets).
Faucets and Sinks for Currencies and Goods
Macroeconomic Management
Measuring inflation / deflation of a currency using Consuming Price Index (CPI).
Decide on a basket of goods that represents what an average user would be buying in a given time
Then note down how much it could cost to buy that basket on the market at regular intervals (e.g. weekly)
CPI = Cost of the basket this week / Cost of the basket in the base week x 100
Gini Coefficient: Measures the average deviation of a variable from a perfectly equal distribution (i.e. measure of inequality in the population).
0 = perfect equality
100 = everything owned by one person
Inequality can be addressed via progressive and regressive faucets and sinks
E.g. Progressive tax is higher for the rich and lower for poor people. Regressive tax is the opposite.
I recommend getting the book to go through for yourself and as there’s a lot of content that I didn’t highlight that may be relevant to designing your game!
Get it here: Virtual Economies: Design and Analysis
I wanna share some thoughts. I believe all in-game resources, items, etc should be tradeable in secondary market whenever possible except stuff that are required to complete specific in-game quests. The rewards obtained from completing the quests should usually be untradeable, but could also be tradeable if it's limited edition quest. Untradeable rewards can be thought of like "Achievements" that usually can't be obtain by "buying achievements". Quests should be the tool used to limit how much players can pay-to-win (P2W).
Also, in-game stuff should as much as possible be created through playing the game. For example, if the game dev wants to create a skin and sell it directly to players, they should make the skin obtainable through completing quests, and let the free market determine the price of the skin. The ideal world is such that game devs only generate revenue through marketplace fee.
If the game has PvP elements, there should be PvP formats that forces everyone to play below a level of resource. For example, Hearthstone has Classic format that limits cards to only the classic set which contains a lot of free cards.
So, there can be different formats that also provide different level of PvP rewards. I think it's a great idea to even have a format that limits to free-to-play (F2P) that also generate rewards. I think the best approach for such is seasonal leaderboard reward or tournament reward, and avoid single match reward so that bot farms can't just generate reward freely.