Chi-Coder: Economics In Games.

That’s one sexy blog title, right?  Nothing gets the engine revving like some economics.  Regardless of the dry nature of the title, I have a topic that’s been on my mind for a long time now, and one that I think I’m ready to properly articulate.  Hopefully I can do so without being too dry.  We’ll see.  Anyway, I’d like to talk about the strange nature of economics in video games, and the odd place that I think the industry could be heading.  To be clear, I’ll be talking about economies within games, not the overall economy of the industry.

The origin of the issue.

As our regular readers are no doubt aware, I’m a self-proclaimed Blizzard fanboy.  When Diablo 3 first launched I was incredibly excited.  The real money auction house was an extremely odd addition though.  Not only did it feel weird in the game, but it quickly degraded the game play experience.  At the very beginning though; before the hate was so palpable, I began to develop a theory about what the AH could mean for the game, and for the world at large.

Before I delve into my theory, here’s a quick primer on Diablo 3 auction house.  In Diablo 3, you defeat monsters and they drop loot.  Sometimes that loot is just gold, the main currency you use to buy equipment, and sometimes that loot is the equipment itself.  So you run around, kill a bunch of stuff, grab your gold and your items, use the items you like, sell the ones you don’t, rinse, repeat.  The auction house allowed players to sell the items they didn’t want to get more gold.  Where it got weird was that it also allowed players to sell their items for real money, and sell their in-game gold for real money.

Games as commodities.

The Diablo 3 auction house was so weird to me because it made me question the nature of what is, and isn’t, acceptable financial practice.  Here’s what I mean.  By allowing players to sell their gold for real money it made gold something akin to a commodity, like you’d find on the stock market.  Some people sell corn or oil or sugar; we’d sell gold.  Like most other commodities, gold would be affected by the environment of the market.  If there is a drought and less corn is produced, the price goes up.  Likewise, if a new patch were coming out for Diablo 3, it might affect the price of gold.  The thing is, real world commodities are heavily regulated to combat things like market manipulation.  Diablo 3 was the wild west by contrast.  If you found an exploit for the game that allowed you to make a billion gold in one day, you could sell that gold and make some serious profit.  The legality of such a system seemed pretty questionable, but I assume that Blizzard wouldn’t have made the decision without first ensuring that they wouldn’t go to jail or get shut down.

Gold isn’t the only thing that made the system interesting.  As I mentioned above, items dropped as well, and those items could also be sold for real money.  This meant that in addition to playing the game to earn gold, one could also play the game to earn items that they could sell.  Theoretically, a person could play 12 hours of Diablo 3 a day and make enough in gold and items to possibly pull in a few bucks.  Items are more interesting than gold though because they’re more like mining diamonds.  You see, most items in the game aren’t worth much; and the few that are don’t have set statistics, so just because you managed to find that one really rare sword doesn’t mean it will be a great version of it.  That said, if you did manage to find a really rare item that also had great stats, it could be sold for huge amounts.  This had the obvious effect of turning some players into ‘farmers’ who would simply play the game to earn gold and items to be sold for real world money.

Diablo 3: Stock Trading Simulator

The more major affect of the auction was the creation of players who didn’t actually play Diablo 3 at all.  They would simply sit on the auction house, wait for players to list items for less than typical market value, and then buy those items up to resell.  Items became like individual stocks on the stock market, with prices fluctuating constantly.  Smart auctioneers could turn large amounts of profit in both gold and real money doing this.  One player even boasted making up to $30,000 over the course of about 6 months.  He never even played the actual game.  The auction house created a system where the opportunity to make real money became more enticing that playing the actual game.

But who cares?

So the Diablo 3 auction house was a huge embarrassing failure, to the degree that even Blizzard executives apologized for it.  The system destroyed the spirit of the game, making it easier for the average player to simply buy the gold or items they wanted rather than earning them.  But what if it hadn’t been a failure?  What if somewhere, at some point, a game gets that formula right?  There are so many dangerous implications of the system.

For one, do you have to pay taxes on your ‘income’ from such a system?  Diablo 3 itself never made mention of such a thing, and I don’t believe that they removed taxes from your earnings or sent the IRS a 1099 or W2 form.  So all of the money you could have made in such a system was, apparently, tax free.  For the rest of us that doesn’t seem fair.  In fact, in a world where playing the auction house is a tax free proposition, that seems like a pretty great job to me.

A far larger problem is the issue of regulation though.  First off, no one was regulating Blizzard.  In the real world a company who’s stock is public has a legal responsibility to it’s stock holders.  That is to say, the company isn’t allowed to make irresponsible decisions that would negatively affect stock holders, at least not knowingly.  Blizzard had no such regulation.  They could have manipulated or destroyed their own market in any number of ways…with impunity!  Players who had amassed massive amounts of gold could, theoretically, seen Blizzard simply decide to wipe the slate clean and erase their stash.

The weirdest part of this though, is the idea that Blizzard had, perhaps, created a nation.  I know that sounds weird but bear with me here.  You’ve most likely heard of a currency exchange.  You take your dollars or your euros or your pesos and you exchange them for the currency of another country.  How is that different from exchanging gold for dollars?  One of the currencies is digital, but beyond that, the gold essentially just like any other currency.  And who gets to ‘create’ currencies?  Sovereign nations.  Nations are in charge of creating and managing their own currencies, exchanging those currencies with other nations, and regulating the creation and usage of those currencies.  In theory, isn’t that exactly what Blizzard did?  They created gold, regulated it’s creation by the amount that dropped from monsters, and then regulated the usage by limiting it to the purchase of items.  But had the system gone over well, wouldn’t it have been possible to have a debit card that could be used in the real world that immediately sold gold and converted it to dollars when you made a transaction?  And again, isn’t that what we do as citizens of our respective nations?  Does that mean that by participating in Blizzard’s economic system we would have been citizens of Blizznation?  Obviously it’s all incredibly muddled and my example is exaggerated, but hopefully you see my point.

What does it all mean?

Clearly Blizzard’s attempt at a real money auction house wasn’t successful, but it really got my wheels spinning.  What if someone did get it right?  Games have typically been just that, games.  By allowing players to earn real world money through their digital endeavors there is potential for all kinds of economic weirdness.  I certainly don’t believe that we’re on the verge of some cyberpunk world where we’re citizens of nations owned by corporations, but it’s still a very strange concept.  And if a company as large as Blizzard gave it a go, there’s no reason why other companies won’t either, and when someone finally gets it right, it’ll be interesting, that’s for sure.