[MUD-Dev] "On Virtual Economies" by Castronova
Koster
Koster
Wed Oct 23 11:00:47 CEST 2002
Ed Castronova has written a new paper, it's been Slashdotted
already, and it's at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=338500.
It has a pretty nice take on the 'origin of avatar' thing btw. :)
Also a nice diagram of influences and developments tracing online
worlds from earlier games.
<EdNote: Thanks go to Richard Woolcock for bring this to my
attention first (off-list). Copy below (minus diagram). All errors
in formatting or representation are mine in the translation from PDF
to text.>
--<cut>--
ON VIRTUAL ECONOMIES
EDWARD CASTRONOVA
CESIFO WORKING PAPER NO. 752
CATEGORY 9: INDUSTRIAL ORGANISATION
JULY 2002
An electronic version of the paper may be downloaded
· from the SSRN website: http://ssrn.com/abstract_id=338500
· from the CESifo website: www.CESifo.de
CESifo Working Paper No. 752
ON VIRTUAL ECONOMIES
Abstract
Several million people currently have accounts in massively
multi-player online games, places in cyberspace that are effectively
large-scale shared virtual reality environments. The population of
these virtual worlds has grown rapidly since their inception in
1996; significantly, each world also seems to grow its own economy,
with production, assets, and trade with Earth economies. This paper
explores two questions about these developments. First, will these
economies grow in importance? Second, if they do grow, how will that
affect real-world economies and governments? To shed light on the
first question, the paper presents a brief history of these games
along with a simple choice model of the demand for game time. The
history suggests that the desire to live in a game world is
deep-rooted and driven by game technology. The model reveals a
certain puzzle about puzzles and games: in the demand for these
kinds of interactive entertainment goods, people reveal that they
are willing to pay money to be constrained. Still, the nature of
games as a produced good suggests that technological advances, and
heavy competition, will drive the future development of virtual
worlds. If virtual worlds do become a large part of the daily life
of humans, their development may have an impact on the
macroeconomies of Earth. It will also raise certain constitutional
issues, since it is not clear, today, exactly who has jurisdiction
over these new economies.
JEL Classification: L86.
Keywords: information and internet services, computer software.
Edward Castronova
Department of Economics
California State University
Fullerton, CA 92834
U.S.A.
ecastronova at fullerton.edu
"I play for my kid. He's a cool dude and has some health
problems that keep him out of school from time to time and he
needs something to focus on. Don't get me wrong, this kid was
born being 80 years old, incredibly mature, creative and
intelligent enough to manage A's even when attending school only
3 out of 5 days for most of the year. Anyways, we've always been
`simpatico', both being creative and analytic at the same
time. He loves to share his on-line adventures. What started 3
years ago with Tribes (yes, I was a clan mom) evolved into
Tribes RPG (yes, we ran a mod on our own server) and segued into
DAoC [Dark Age of Camelot]. After hearing him talk about it, and
scrolling through forums, I decided this looked intriguing. It
would be a good way to `buddy up' and go have some fun with
him. Anyways, I watched over his shoulder one day, and said, ok,
that's it, I'm getting a version myself. Started that
night. D&D/RPG stuff is fairly easy to get one's head around. We
teamed up, and proceeded to level quickly...My daughter of
course, had to join the fun. Soon the whole family was talking
about strategy and `the funny thing that happened today while I
was leveling...'" - Gelenii, posted 6/8/02 at
was leveling...'" - Gelenii, posted 6/8/02 at
daoc.catacombs.com.
I. Introduction
At this writing, there are several million people around the world
who have access to a MMORPG account. [1] A MMORPG (massively
multi-player online role playing game), more simply a virtual world,
is an internet-based game that can be accessed by large number of
players at the same time. Players choose a physical self, an avatar,
and then spend their time running about in the game world, chatting
with others, undertaking various tasks, purchasing, producing, and
consuming goods, and generally leading a more or less full, rich,
and detailed life there. Many of these players spend no more time in
virtual worlds than they do in ordinary hobbies. Many others,
however, approach virtual worlds as an alternative reality, devoting
a substantial fraction of their time to them. According to a survey
in Summer 2001, about one third of the adult players of EverQuest
spent more time in a typical week in the virtual world than in paid
employment 3 (Castronova, 2001a). Since that time, at least ten
major new titles in development have been announced, including
several by corporate powerhouses such as Microsoft, Vivendi, and
Sony. As this market expands, it seems entirely possible that living
a part of one's life in cyberspace may eventually become a common
practice.
Such a development would be worth some attention, because life in
cyberspace seems to be different in important ways from life on
Earth. This is especially true of economic life. True, at first
glance there are many similarities between Earth economies and their
virtual counterparts. In an earlier paper (Castronova, 2001a), I
described the economy of Norrath (the virtual world of the game
EverQuest) as if it were a normal Earth economy, complete with
statistics covering such activities as production, labor supply,
income, inflation, foreign trade, and currency exchange. There is
evidence that the economies of these virtual worlds generate a
surprisingly high level of per capita production, and that people
who `live' there (a substantial fraction view themselves as
citizens) have accumulated significant stocks of real and financial
wealth. All of this suggests that there is something very normal and
mundane about cyberspace economies; people live there, work there,
consume there, and accumulate wealth there, just as they do on
Earth. [2]
However, further thought suggests that virtual economies may be
anything but normal. As an example, consider a simple policy
question: Should governments attempt to control prices? Most
economists would say `no,' since the costs of doing so outweigh the
benefits. Moreover, the costs often end up being borne by the people
the policy is supposed to help. These perverse effects happen
because any effort to control prices creates either excess supply or
excess demand, which in turn generates all kinds of social
costs. Surplus goods must be bought up and destroyed, or shortage
goods must be allocated by a mechanism that usually turns out to be
both unfair and costly. But what if it cost the government nothing
to buy up a surplus of goods and destroy it? And what if the
government could simply produce whatever quantities are demanded, at
no cost to itself? If those two acts were possible, then a policy of
government price control would be feasible. And in cyberspace, the
coding authority does indeed have the power to create and destroy
any amount of any good, at virtually zero cost. Therefore, as a de
facto government, the coding authority can indeed control
prices. And therefore, price controls may actually be good policy in
cyberspace, even though they most certainly are not good policy on
Earth.
The example suggests the possibility that virtual economies may be
very different from Earth economies, in certain well-defined
ways. As economic and social activity gradually migrates from Earth
to cyberspace, these differences may begin to have an impact on the
lives of large parts of the population. Details about the
functioning of virtual economies may, in time, become important
public issues. Even today, small changes in the code of a game can
generate intense controversy among the players. If these little
firestorms are a portent of things to come, it would be useful, even
now, to analyze some of the unique features of virtual economies and
ask how these features may eventually influence economic and public
policy questions.
As an initial approach to these issues, consider the following two
kinds of questions:
1. The future of games: Will multi-player online games become an
important part of the social life of humans? What does the market
for games look like? What sort of market structure can we
anticipate in the future?
2. The impact of games: How would a large emigration of work and
play time to these virtual worlds affect the economy of the real
world?
The paper attempts to address these questions, beginning, in Section
II, with a brief history of games. This is not so much a general
history of gaming as an effort to gauge the cultural importance of
avatar games - games in which the player embodies a game piece in
avatar games - games in which the player embodies a game piece in
the same way that avatars tend to become a person's bodily self in
the virtual world. Section III then develops a simple rational
choice model for determining the demand for game time. Given the
unique features of gaming as a consumer good, Section IV assesses
possible market structures in the games market - will one game
eventually dominate the world? Section V considers the macroeconomic
implications of large-scale expansion in the gaming phenomenon,
especially for GDP and the tax base. Section VI lays out some of
the policy issues that widespread gaming will raise. Section VII
concludes with a list of simple teachings in economics that are held
to be always true on Earth, but that seem to be less than entirely
true, or at least open to doubt, in virtual worlds. These topics
represent avenues of future research.
II. A Brief History of Avatar Games
Participation in virtual worlds is, at the moment, participation in
a market for games. At an abstract level, what are the special
features of such a market? How do games differ from other goods in
the economy? The first step would be to define the object we are
after, but defining "game" is difficult. The Oxford English
Dictionary lists 17 senses of the word, from an "amusement,
diversion, or pastime" to " a proceeding, scheme, intrigue,
undertaking, followed up like a game." Perhaps it is easier to say
that our culture identifies certain practices specifically as games,
and we are most interested in the class of games that have now
become virtual worlds. That is, while recognizing that both
solitaire and football are games, they are not games that have
evolved to the point that the people who play them view them as
essentially an alternative reality. I will refer to games with some
sort of alternative reality as `avatar games.'
In an avatar game, the players use a single game piece to represent
themselves in the make-believe play environment. Avatar is a
Sanskrit word that identifies earthly manifestations of the god
Vishnu. When Vishnu incarnated himself as a tortoise, he was named
Kurma; when he appeared as the fish, he was named Matsya. [3] The
idea is that the Earthly being - the avatar tortoise or fish - was
idea is that the Earthly being - the avatar tortoise or fish - was
the embodiment of a higher being. In 1985, F. Randall Farmer and
Chip Morningstar developed Habitat, the first multi-user domain with
a visual 2D interface, and they chose avatar as the term for the
cartoons that users would drive around the virtual world. Thus I,
Castronova, would have appeared in the Habitat multi-user
environment as "Bird," a parrot-headed puppet. All of the
contemporary virtual worlds use this convention; when you enter the
world, you are driving a 3D representation of a being in that space;
that being is your avatar, the embodiment of you in that physical
environment.
History suggests that avatar games such as these are by no means a
transient cultural phenomenon. On the contrary, they appear to be an
extremely ancient aspect of culture. Moreover, human interest in
avatar games seems to have been driven by technology: as technology
has enhanced the immersive experience of the games, the games have
become more popular.
These connections are illustrated in Figure 1, which provides a
short timeline of game development from ancient games using wood,
paper, and cloth, to the most recent computer-based role-playing
games. [4] The first game that we know of was the Royal Game of Ur
(c. 2500BC), and it seems to have been an avatar game; it involved
racing a game piece - the first game avatar - around a board. Some
2000 years after the Royal Game of Ur, we have the first games
identifiably related to games we know of today. Games simulating
warfare seem to have been the first to emerge, the most famous being
chess and go. Advances in technology allowed these conflict and war
games to become more and more realistic (Kriegsspiel, 1811), so that
by the mid-1960s it was possible to play a number of games offering
fairly accurate simulations of actual battles (e.g. Tactics,
1954). By the mid-1970s, there were any number of games which
allowed a person to immerse himself for many days in the fantasy of
being Napoleon or Hitler.
Figure 1. Development of Avatar Games
Meanwhile, a parallel development saw the racing aspect became a
metaphor for personal achievement. Moksha-Patamu (c. 200 BC) is
apparently the first game in which a player embodies a single
playing piece and then attempts to develop or build that playing
piece into something better. I would argue that it is the
ur-ancestor of all avatar games. The game is known today as Chutes
and Ladders, and was intended to teach Hindu children how to attain
moksha (heaven, bliss, and release from the eternal cycle of
reincarnation) despite being tempted by various sins (patamu). Doing
good deeds allowed players to advance on ladders, doing bad deeds
dropped them down chutes (snakes in the Hindu
original). Moksha-Patamu was imported to the UK in 1892 as Snakes
and Ladders, but its game mechanic was applied to morality games
much earlier in the Victorian era, notably Anne W. Abbot's Mansion
of Happiness (1843). Later, Lizzie J. Magee applied the avatar game
mechanic to the acquisition of wealth in the Landlord's Game (1904).
Charles B. Darrow took the same ideas and made Monopoly in 1934, a
game that soon became standard in household game cupboards all over
the world. As with conflict games, by the 1960s these
individual-advancement games had developed to the point that a
person could immerse himself in the fantasy of being a landlord,
tycoon, or other kind of mogul for hours or days at a time.
At this point, two entrepreneurs in the simulation wargaming
subculture, Dave Arneson and Gary Gygax, hit upon the idea of making
a simulation at the 1:1 level, so that each player commanded exactly
one soldier. And rather than simply endow their soldier with a
standard set of equipment, they opted to allow a soldier to build up
his powers and skills through good play, as in moksha-patamu. In
order to broaden the skills a soldier could attain, they then chose
a fantasy setting, drawing on concepts whose ultimate source was
J.R.R. Tolkien's Middle Earth. The result was a set of gaming rules
that was released as "Dungeons and Dragons" in 1972. As is well
known, Dungeons and Dragons offered a very immersive experience; an
urban legend at the University of Wisconsin (known to the author)
holds that several old D&D players have maintained their alternative
reality in the campus tunnels for decades.
By this point, computers have begun to enter the picture. The first
video game was a wargame, Spacewar, invented by Stephen Russell in
1962. There then emerged a whole genre of popular computer-based
conflict games for one player or a small team. In 1992, id software
released Wolfenstein 3D, a game with 3D graphics and a first-person
perspective. For the first time, the player actually could see the
world through the eyes of an avatar.
Over the same time period, computer games with many players emerged,
initially as text-based multi-user domains on internet-linked
terminals. Richard Bartle and Roy Trubshaw developed the first of
these, basing the game on Dungeons and Dragons. In 1985, F. Randall
Farmer and Chip Morningstar made Habitat, a multi-user domain using
2D avatars roaming in 2D spaces, in a third-person perspective. What
was most interesting about these MUDs was the fact that they did not
go away when the player stopped playing. The game environment and
the objects in it persisted in time. Players could choose to visit
the place whenever they wished. The only real difference between
these places and our world was the lack of a first-person visual
perspective: you could live in that place, but you could not
perceive it through your own eyes. At best, you could see yourself
there; you could not actually be there.
In 1996, 3DO combined the MUD multi-player idea with a
Wolfenstein-like 3D graphics engine, and released Meridian 59, the
first virtual world per se. The game had the immersive feel of a 3D
first-person action game, but the game world persisted in the same
way that MUD worlds persisted. In 1997, Electronic Arts combined the
MUD concept with Habitat's 2D world, and released Ultima Online,
again a virtual world that did not go away when the player left the
game. While Meridian 59 did not catch on with the playing public to
any great extent, Ultima Online did, and still has at least 200,000
active subscribers. Ultima Online then spawned Lineage, a 2D
multiplayer game that has become the most popular virtual world,
with some 4 million subscribers. In 1999, Sony's EverQuest and
Microsoft's Asheron's call managed to build very large and
successful virtual worlds using the first-person 3D perspective of
Meridian 59. Both games are still a strong presence in the market,
with hundreds of thousands of active subscribers. First-person 3D
seems to be the future of the genre; the two releases of 2001, Dark
Age of Camelot and Anarchy Online, both were first-person 3D. Both
games have been successful, again with hundreds of thousands of
subscribers within a few months of opening. As for the future, the
final box in Figure 1 lists several virtual world titles that are
known to be in development by well-funded companies. The market in
massively multiplayer first-person 3D games seems poised to
grow. [5]
Overall, the historical perspective delivers a fairly strong
message: human participation in avatar gaming seems to be driven
strongly by technological evolution. Our desire to live a fantasy
life has probably been constant, although one could argue that
industrialization, the mechanization of existence, the growth of the
work ethic, and the resulting destruction of family life may have
made the desire for make-believe living more intense. But the real
contribution of technology has been in the means by which this
fantasy life becomes possible. Wooden game pieces do not provide a
particularly immersive experience, and it takes a great deal of
mental effort to maintain the fantasy that one really is bobbing up
and down between Moksha-Patamu's heaven and earth. But now that
computers have begun to make near-immersion experiences possible (if
you have ever flinched while playing Quake, you will know what I
mean), the amount of time and resources devoted to producing these
experiences seems to have been rising. [6] This suggests that as the
technology of gaming advances, we can expect gaming to become an
increasingly important part of daily life.
Does any of this make games worthy of deeper exploration? When
people enter a virtual world, perhaps they are "just playing a
game," so why should it matter. On the other hand, we can also say
the same thing when people "play" the stock market, a game that
certainly does matter. Nonetheless, to some, there is a difference
between interactions that we label, literally, as games (checkers)
and ones that we label as games only in a figurative sense (the
stock market; elections). And then it is claimed that is similar to
certain aspects of Hindu religion, in which a person is allowed to
choose one of several "ways," with each way entailing a certain path
of advancement to enlightenment. Arneson and Gygax, however, got
their ideas from the specialization of roles in western military
formations, not from Hindu teaching. It is odd that several core
concepts of Hinduism seem to have appeared unintentionally and
independently, in two places, in the world of 21st century gaming.
13 behavior in the literal games is more important than behavior in
the figurative games. To this way of thinking, there is a difference
between real life and game life, and if something is only a game, it
isn't "real." So it does not matter.
To others of a more contemporary mode of thinking, however, the line
between real and unreal is blurred. When post-modernists say, "life
is a game," they are not just invoking a metaphor, they mean
it. Life really is a game, and games really are life. [7] If one is
important, so is the other. Games matter.
The fact that games matter to postmodern cultural theorists does not
mean they deserve any specific treatment by economists. To address
this issue, the next section asks what an economic theory of gaming
behavior might look like, and what the consequences of gaming may be
for economic well being.
III. An Economic Theory of Games: The Puzzle of Puzzles
To develop a theory of the games market, it might be natural to
start with the field of game theory. However, game theory, as a
research program, is mostly interested in improving methods of
general strategic analysis - its objective is not to analyze the
general strategic analysis - its objective is not to analyze the
markets for cultural objects identified by the word " game." Game
theory is interested in fascinating games like the Prisoner's
Dilemma, but you will not find a home version of that game in toy
stores ("Now with repeated N-player action!"). And a search of
several literatures in the social sciences suggests that neither
game theorists nor anyone else has devoted much time to the things
that we call games in the real world, even ones as simple as
checkers. [8]
Absent any specific prior theoretical treatment in economics,
perhaps the most intuitive approach might be to think of the market
for games as a market for simple, durable entertainment goods. From
the modernist way of thinking, this would be the right choice: there
is nothing in a game but entertainment, which people enjoy and pay
for; hence the demand for games is like the demand for, say, books.
The post-modernists would counter that at the level of massively
multiplayer gaming, the metaphor of games-as-books breaks down
fairly completely. Gaming remains an entertainment good, but it
immerses the player so thoroughly in the virtual society and economy
that events in the virtual world have an emotional impact on people
no different from the impact of Earth events. Events in the virtual
world can have an influence that extends well beyond the borders of
the virtual world; relationships, incomes, and even lives on earth
may be affected. Thus, a post-modern way of thinking would require a
theory that is unique to games, in recognition of the importance
that real- world people place on events that happen in the game.
Economists are apparently forced to be post-modernists on this
question. The economic theory of value seems to require it. In
economics, the value of objects does not depend on their
characteristics or their components, but rather on their
contribution to the well-being of the people who use them. Value is
subjective, wholly created in the minds of people. If people in free
markets determine that a shiny crystal called `diamond' is worth
$100,000, economists basically accept the reality of that
valuation. If the object in question is not a shiny crystal called
`diamond' but is rather a magic sword called `Excalibur,' that
exists only in an online game, economists would still put the value
of the item at $100,000. Similarly, if people are willing to incur
large time and money costs to live in a virtual world, economists
will judge that location to be lucrative real estate, regardless of
the fact that it exists only in cyberspace. The mere fact that the
goods and spaces are digital, and are part of something that has
been given the label "game," is irrelevant. Willingness to pay, to
sacrifice time and effort, is the ultimate arbiter of significance
when it comes to assessments of economic value. As avatar games
consume more human time, the assets within them will very likely
grow in value; understanding how these assets are produced and
traded will ultimately require a unique theory of the demand for
avatar gaming.
As soon as one begins to think about an economic theory of the
demand for gaming time, however, one encounters a puzzle relating to
the nature of constraints. Put succinctly, in a normal market the
demanders are willing to pay money to have constraints removed, but
in a games market they will pay money to have constraints
imposed. Think of a market for puzzles. A puzzle with nine hundred
billion pieces would probably not command much willingness to pay,
since the entertainment value of the game involves solving the
puzzle, and that seems impossible. The agent gains emotional
well-being by choosing actions that maximize the progress toward
solving the puzzle, under the constraints imposed by the inherent
difficulty of the puzzle. A puzzle that is too hard imposes
constraints that are too severe and is no fun; relaxing the
difficulty constraint should therefore raise utility and hence
willingness to pay. However, a puzzle that is too easy is also no
fun - who would pay money for a puzzle with only two pieces? If the
fun - who would pay money for a puzzle with only two pieces? If the
puzzle went from two pieces to, say, 100 pieces, however, it would
become more difficult but also more entertaining, and would
therefore command a greater willingness to pay. The puzzle of
puzzles is that the demand for a good can rise when a constraint
becomes tighter.
The puzzle of puzzles arises primarily because economics is
constructed from a model of human behavior that asserts a universal
conflict between our ends and our means. The essence of behavior, to
the economist, is a process of choosing actions under the constraint
that we cannot have everything we want. Formally, our wants are
given by a utility function, and we seek to maximize this function
subject to our constraints. If anything happens to release the
constraints, say if the price of a good falls, then our utility goes
up. Most economists would also assert that we are happier. Utility
is good, constraints are bad. If we want to make people happier, we
should remove their constraints. Hence, if we want to give people
puzzles that make them happier, we should make the puzzles less
challenging; by this reasoning, puzzles imposing the lightest
constraints should be the most demanded in the market. This line of
economic reasoning therefore leads to a deep conflict with observed
behavior in game markets; players hate games that are not very
challenging. It seems, then, that an economic theory of demand for
puzzles, games, and other interactive entertainment goods needs to
modified in some way to allow for constraints that can raise utility
and demand.
As a start toward such a theory, it is probably reasonable to assume
that emotional well-being is always one goal of human
behavior. People do things that make them feel happier. Secondly, it
is also probably safe to assume that confronting and overcoming
challenges makes people happy. Given the choice between a puzzle
that is mildly challenging (put together a 100-piece puzzle) and one
that is not (put together a two-piece puzzle), people will prefer
the mildly challenging puzzle. At the same time, most people would
prefer a 100-piece puzzle to one with 100 million pieces; the
function relating challenge to fun is not monotonic. Third, if there
are rewards for solving puzzles, we can assume that a puzzle with
higher rewards is preferred, holding challenge levels equal.
These assumptions can be summarized in a simple economic model. Let
S measure the emotional satisfaction a player receives from working
on a puzzle, and let R and C indicate the available reward and the
challenge level, respectively. Then we can capture the assumptions
above with a simple function like this:
1) S = R - (C - )2
where represents the challenge level that is ideal for the player.
Now we can introduce the utility function as a function that
indicates, numerically, the intensity of an individual's desire to
achieve some objective. [9] When it comes to games and puzzles, the
choice involves the amount of time to spend in one game versus
another. Suppose we had games A and B, each producing satisfaction
levels SA and SB per hour of play. Let the choosing agent have T
hours to allocate between the two games. A simple utility function
that illustrates the choice problem is:
2) U(HA, HB) = SAln(HA) + SBln(HB)
where HA and HB are hours of play in the two games. If total time
available is denoted T, hours would be allocated by maximizing the
utility given in (2) subject to the constraint T = HA + HB. This
setup assumes that the differing rewards and challenges of the two
games produce different levels of emotional satisfaction, and that
the satisfaction effects acts as weights in the motivational
function. And while play time in one game does not affect the
satisfaction one receives from play time in the other, there is
nonetheless a diminishing marginal utility from game play:
repeatedly playing the same game gets boring. In this setup, the
player allocates time between the games in an intuitive way: she
plays games with higher rewards more often; she spends more time on
games whose challenge level is not too high and not too low; and she
will play a game that is less inherently satisfying, at least for a
time, simply for the variety of it. [10]
We can introduce the price of gaming as follows. Let pA and pB be
the prices of games A and B respectively, and let G represent
consumption of all goods other than game play. [11] Let pG = 1. The
utility function will have G as a third argument, but if the agent
has Y dollars of income to spend on games and other goods, then we
have
3) G = Y - pAHA - pBHB
3) G = Y - pAHA - pBHB
The objective function regulating hours of game time could then be
expressed as
4) U(HA, HB, Y - pAHA - pBHB) = SAln(HA) + SBln(HB) + ln(Y - pAHA - pBHB)
4) U(HA, HB, Y - pAHA - pBHB) = SAln(HA) + SBln(HB) + ln(Y - pAHA - pBHB)
As above, the agent would solve this problem to find the optimal
levels of HA and HB, and would allocate time accordingly. Games that
are more fun would be played more often; no one would devote all of
his time to one game; games that are more expensive to play would be
played less often.
Whether this is a particularly elegant approach to the market for
games is open to debate, of course, but it certainly is useful for
exploring some of the unusual features of that market, specifically
its interaction with real world labor markets. According to an
earlier paper on EverQuest (Castronova, 2001a), many people spend
more time in games like EverQuest than they do at work. Moreover,
those who devoted more time to the game seem to have somewhat lower
wage rates, but not dramatically lower. At the same time, that paper
documented the fact that people can make real money by selling the
digital items that they produce while playing. There seems to be a
distinct emigration of work time from Earth to Norrath. This is an
important aspect of real world gaming, and it has distinct, and odd,
implications in the context of this choice model.
To explore this further, assume the choice is between work time,
denoted by L, and time in a single game, denoted by H. Let game time
have a price p, and produce satisfaction S, and let work be
compensated at the wage rate w. Then
5) Y = wL
Let non-gaming leisure time be Z, a third variable in the utility
function, given by
6) Z = T - H - L
6) Z = T - H - L
Continuing with a log-linear utility function, we have:
7) U(H, wL - pH, T - H - L) = Sln(H) + ln(wL - pH) + ln(T - H - L)
7) U(H, wL - pH, T - H - L) = Sln(H) + ln(wL - pH) + ln(T - H - L)
The agent allocates time among the game and work so as to maximize
Equation (7).
While the problem does not admit a simple solution, inspection of it
reveals a number of interesting features of the demand for
games. First, the constraint aspect of the games, given by the
challenge level C, enters the model as a weight on the utility
function. This separates it mathematically from the constraints of
time and money, which, in most utility maximization problems, appear
as constraint equations and only enter utility indirectly, as in
(7). Conceptually, this allows us to think of two kinds of
constraints in the world: the traditional constraints of economics
(time and money), whose relief always results in higher utility, and
the new category of gaming constraints, whose relief may actually
reduce emotional satisfaction, and hence result in lower utility.
The Puzzle of Puzzles is resolved here by recognizing that
constraints can have a positive effect on emotional satisfaction,
and therefore states with tougher constraints may actually be more
desirable. The utility function is then designed to give higher
weight to more desirable states, since they are preferred over less
desirable states. As a result, utility can be higher when a
constraint is tougher; hence there can be a willingness to pay for
tougher constraints.
A second aspect worth mentioning is the possibility that wages have
both income and substitution effects with respect to game
time. People with higher wages tend to be richer, hence they will
demand more of all normal goods, including game time. However,
highly-paid people also face a higher opportunity cost of gaming,
hence they will demand less. This suggests that game demand may be
U-shaped with respect to wages. Very well-paid people can play more
because they can afford all kinds of leisure activities.
Poorly-paid people can play more because they are not sacrificing
very much income to do so. Conversely, those with moderate wages may
be very sensitive to the impact of gaming time on their earnings and
careers.
Third, note that money enters this problem in an unconventional
way. As usual, we have goods prices in the budget constraint, and
wages as the price of leisure. What is new is the possibility that
money can enter the problem as a parameter of the utility
function. This happens if the rewards of playing (R), which affect
gaming satisfaction (S), happen to be partly denominated as cash. As
mentioned above, in a game like EverQuest, players can make
substantial amounts of money by farming the virtual world and
selling the produce in internet truck markets like Ebay. Some of
these players explicitly consider these funds as income; some think
of their farming as a job, as work, not play. How should economists
approach this? Perhaps it is a sub-problem, where the agent must
choose to allocate time between Earth work, virtual work, and
virtual play. Or, perhaps these game earnings should be treated as
a price discrimination scheme, effectively lowering the net price of
the game for the more serious players. In that case, farm receipts
should be taken out of R, and instead be subtracted from p in the
budget constraint. A third approach would be more radical: instead
of thinking of game time as partly work, perhaps we should think of
work time as just another game. Then the issue can be handled
elegantly in Equation (2). Game A happens to be the always-exciting
"Work Game of Earth," where you go to the office and face the
challenges, denoted C, presented by your boss, your co-workers, and
your competitors, and where overcoming those challenges garners you
rewards, denoted R, in the form of wages, perks, fringe benefits,
and assorted entertainments involving the office copy machine. [12]
People who get more satisfaction from Game A will put more time into
it. Nonetheless, Game A can get boring, so even the most rabid fan
of Game A will be observed putting some time into Game B. Regardless
of how it is approached, it is clear that there is a substitution
between earth work and game time that depends, to some extent, on
the financial rewards available in each.
Thus, simple as it is, the framework developed so far throws light
on the two most critical aspects of gaming as an emerging economic
phenomenon: Game time is a substitute for other consumption goods,
and it is also a substitute for work time. The degree to which this
substitution occurs depends on wages and prices both on earth and
inside the games. It also depends on the emotional satisfactions and
general costs of game time. In the most radical approach to
game/work substitution, the emotional satisfaction of Earth work are
directly compared to the emotional satisfaction of game time. These
Earth/game substitutions involve real economic transfers. It has
already been shown (Castronova, 2001a) that labor devoted to games
produces durable economic assets with observable market values. The
wealth stock and annual production of a game world is already
significant on a per capita basis; they will become significant
macroeconomic aggregates if the stream of earth to game substitution
becomes strong. And we can gauge the potential strength of
substitutions into gaming by asking how satisfying and costly game
time may possibly become in the future.
IV. The Market for Virtual Worlds: Technology and Market Structure
We cannot see the future, of course, but there are a number of
technological innovations that are relevant to gaming, that are also
fairly easy to see coming. Currently, access to gaming involves some
sort of access to computing technology, and access to gaming that
can earn money involves access to a shared, persistent, physical
computing environment, specifically a virtual world (Castronova,
2001a). The technology supporting virtual worlds is advancing so
quickly that it would be foolish to describe the next generation in
any detail. Suffice it to say that there are large, lucrative
industries working energetically on different dimensions of the
environment that virtual worlds thrive in.
These industries produce three items of interest, namely,
Connection, Interface, and Content. Developments in connections
involve the internet and, increasingly, wireless
communications. Development of interfaces involves voice command,
heads-up displays, and body motion detection (computer-controlling
gloves, gaze readers). Developments in content involve the supply
side of the market for games, where annual revenues have grown
beyond Hollywood box office revenues. [13] All three industries are
expanding at a rapid rate. Whatever emotional experiences people
seek, it may become possible, in the near future, to effortlessly
connect to a virtual world that provides that experience at fairly
low cost. Kurzweil (1999) argues that the explosion of computing
power alone may be sufficient to change the daily course of life.
Since these developments all involve networks, they may seem to
suggest a monopolistic market structure. If economic life online
involves getting your email and hanging around with friends, there
will be positive externalities with respect to the sheer size of the
virtual world one visits. If I spend my time on Rubi-Ka, while you
spend your time in Albion, we cannot talk to one another, and we
cannot do things together. Thus, our time in virtual worlds is more
valuable if everyone we know is in the same world. Moreover, if two
worlds compete and one has more players than another, wouldn't
everyone have an incentive to join the larger world, so as to enjoy
the larger network of society, communication, and entertainment that
it affords? Might such network externalities lead to a domination of
this market by one player?
There are reasons to expect, however, that this market is not likely
to be monopolized. First, there seems to be a great diversity of
tastes for the different features of a world. Mr. Bird may want to
be on Pluto, while Mr. Castronova prefers medieval Britain. One of
the major attractions of life mediated by avatars is the anonymity
it affords, and anonymity requires a person to have exit options,
other worlds to escape to if one's reputation in this one gets
unpleasant. Perhaps a savvy game developer could make a world so
large and varied as to provide the essential minimum level of
entertainment and anonymity to a sufficiently large number of
people, so that membership in that one world becomes optimal for
all. This seems unlikely, however, given that there is a marginal
cost to creating and maintaining game content. [14] Moreover, there
are no economies of scale on the supply side to match the increasing
returns on the demand side (Liebowitz and Margolis,
1994). Production of game content and its maintenance are both labor
intensive activities. One could perhaps increase production of
content by allowing other producers (say, by opening your game code
to the public), but continued control of the world being created
would be problematic. [15] On the whole, it seems very unlikely that
one developer could produce a world big enough to monopolize the
market. A second reason involves congestion. Virtual worlds are
virtual because they are online, but they are worlds because there
is some physicality to them. Avatars take up space. If a world has a
certain amount of entertaining content in it, that content will
almost always be subject to some kind of congestion effect. The cool
monsters are in the Dungeon of Befallen, but if tens of thousands of
us go there to hunt them, none of us will have a good time. Often
the only way to reduce congestion is to add content, which, again,
is labor intensive. There will also be congestion effects related to
connection speeds and bandwidth.
A third reason that the market will probably not be dominated by a
few companies can be found in the many competitive strategies that
are available even now, but have not yet been exploited by new
entrants. For example, the current set of developers have managed to
impose huge switching costs on players by structuring game play
around the time-intensive development of avatar capital. A player
starts the game with a weak avatar, but game play gives the avatar
ever-increasing powers. As power increases, the avatar is able to
take more advantage of the game world, to travel farther, do more
things, see more people. A person with a high-level avatar then
faces a high hurdle in switching games, because in the new game he
will start out poor, defenseless, and alone again. This situation
definitely locks in the game's player base, but it is also open to
defeat by any number of schemes to reduce the switching
costs. Surprisingly, no competitor to a current game has offered new
players the opportunity to start their avatars at a higher level of
wealth and ability if they can provide evidence of a high level
avatar in another game. Nor have they offered the opportunity to
buy their way to a powerful avatar from the start. In fact, by not
offering this kind of monetary opt-in, the companies implicitly
encourage the buying and selling of avatars outside the game. In
sum, what appear to be strong lock-ins and switching costs in the
game market today may not be as strong as they seem; when savvy
competitors appear, the player bases will generally be at risk.
A final argument against a monopolization tendency comes from the
nature of the content itself. Games are art, for the most part, and
markets for artistic output exhibit a great deal of churn due to
herding effects and the star phenomenon (MacDonald, 1988).
If a company designs a better game, it will attract players. And
while it is true that development costs can be significant, it will
always be possible to produce a fun virtual world for a tiny amount
of money and then scale it up as it becomes more popular. [16]
Whatever network externalities, supply-side returns to scale, and
barriers to entry may exist in the market for virtual worlds, they
seem insufficient to produce domination by a single company. The
distribution of populations in virtual worlds is perhaps less like a
natural monopoly market than a club goods market. Populations will
sort according to the services, ambience, and fees of the various
worlds. Virtual worlds will compete, as clubs do, but their size
will be limited by congestion effects and by the marginal cost of
increasing the scale of the world.
Having considered the historical technology dependence of avatar
games, the fairly unusual demand theory that they require, and what
seems to be their most natural market structure, we are in a
position to shed some light on the first of the two questions that
have been the object of the study: What will the online multiplayer
gaming market look like in the medium-term future? The preceding
sections suggest that it will consist of a number of large, densely
populated worlds, with varying degrees of portability between
them. These worlds will generate large revenue streams and will
occupy many hours of human time, some of it considered play, some of
it considered work. If current behavioral patterns continue, many of
the hours that people devote to games will result in the
accumulation of stocks of digital capital goods. These objects will
have real economic value, and the total capital hosted by online
worlds will be proportionate to the amount of total hours of labor
input the worlds receive. Given the expected growth in connectivity,
interface technologies, and content, there is reason to believe that
the digital capital stock may eventually become quite large.
These considerations then lead to the next set of questions: If
virtual worlds do become more important, how will this affect the
real Earth economy?
V. A Macroeconomic Impact of Virtual Economies?
If virtual worlds do, in fact, grow as a human phenomenon, there may
be some implications for Earth economies. The implications are
easiest to see if we ignore for a moment the fact that these are
online games, and just imagine what would happen if humans became
obsessed with a general time-consuming hobby, or perhaps a
hallucinogenic drug, that, from the perspective of the Earth
economy, had similar effects on behavior. The effects of most
interest are:
1) People pursuing this hobby/taking this drug generally spend 60
to 80 hours a week in an activity that has essentially no impact,
positive or negative, on the economy. They simply check out of
Earth.
2) Even when they are not pursuing the hobby/taking the drug,
these folks have very little interest in either advancement, or
entertainment, in Earth society. They are able to get some Earth
cash by selling trinkets that they make while hobbying. But their
hearts are not in their Earth earnings. Indeed, they come to Earth
only to work a little bit, and get just enough Earth money to
support their Earth needs, such as food, water, some simple
clothes, and a roof over their head.
These behaviors are hypothetical, of course, but they are credible
in so far as they represent entirely normal behavior on the part of
a substantial fraction of the players of games like EverQuest
(Castronova, 2001a). The question is, what would happen if this kind
of behavior became much more widespread?
First, it is important to recognize that this change does not
necessarily mean that people are worse off. The mere fact that labor
hours that were once producing automobiles are now producing avatars
does not mean anything about the level of wealth in society. The
basket of produced goods is simply changing. Players will be
creating new assets, with real economic value, in online worlds. A
proper accounting could very easily show that the actual production
of wealth per capita is rising.
The difficulty is that current national income and product accounts
do not place any value on online assets. Nor do they seem likely to
do so anytime soon. Concepts like the GDP are nation-based, but to
what Earth nation do assets in virtual worlds belong? The answer is
"none," at the moment anyway. As a result, a migration of value
creation from Earth economies to virtual economies would appear as a
decline in standard measures of economic activity, such as the
GDP. Earth economies would seem to be in recessions or depressions.
A second impact involves the demographic structure of the
transition. If devotion of time to virtual economies has a U-shaped
relationship to the wage, we might predict that migration to virtual
worlds would proceed much like the usual Earth migrations. The vast
majority of émigrés from Earth would be those whose wages on Earth
are low relative to their wages in cyberspace. And then there would
be a substantial number of very well-paid people for whom interworld
travel is relatively costless. Together, both groups might represent
a significant brain drain from the earth economy, the former group
because tech savvy is probably going to receive a higher return in
cyberspace than on Earth, the latter because the well-paid may find
virtual worlds generally more entertaining than Earth. On the other
hand, the opening of a cyberian frontier, like other frontiers, will
have a very refreshing leveling effect: those whose Earth shapes
expose them to brutality, stigma, and insufferable limitations will
find freedom and relief when they live through less stigmatized
virtual shapes.
A final impact worth noting involves the fiscal health of earth
governments. If economic activity migrates into virtual economies,
where there are no earth jurisdictions, there will be a net loss of
taxable assets and incomes in Earth economies. At the same time,
there may be substantial reductions in demand for Earth government
services (i.e. roads). There may be long periods of time in which
the tax base is eroding more rapidly than service demands, and there
may be severe inequalities across jurisdictions in these rates as
well.
Taking these fiscal policy effects together with the possible labor
supply and GDP shocks, it would seem that a large migration to the
cyberian frontier could conceivably impose serious stress on Earth
political systems. Whether or not these shocks and stresses actually
appear depends on the degree to which the connection, interface, and
content industries succeed in their efforts to produce immersive
gaming experiences on a massive scale.
Of course it is not possible to see specific aspects of the future
with much accuracy. What seems most likely, on a broader level, is
that a large migration of economic activity into cyberspace would
have to have some impact on the way that one conceives of the
macroeconomy. New statistics and economic management policies may
have to be developed. However, if the emergence of virtual worlds
does eventually require some governmental reaction, it is still not
clear which Earth governments should be involved. Virtual worlds
seem to exist as separate political entities at the moment, and this
raises new constitutional issues.
VI. Constitution and Governance
Indeed, the most salient current policy issues both within and
outside of games involve issues of governance. In the US, there have
been judicial rulings indicating that Earth courts have no
jurisdiction over events that occur online (Kaplan, 2001). An
argument (unsuccessful in court) has been made that video games are
speech, and are therefore entitled to constitutional protections
that would make game companies the de facto legitimate governments
of their game worlds (Au, 2002). However, players in these games are
citizens of Earth countries and their incomes from game activities
are certainly subject to tax. A full-blown legal analysis would be
inappropriate here, but it is evident that there is confusion about
who is ultimately responsible for events that occur in virtual
worlds. As the value of virtual world assets and trade rises,
economic agents will have ever greater incentives to seek the usual
protections, damages, and claims from some higher
authority. Moreover, the real emotional investment of people in
their online lives will almost certainly lead them to seek out a
forum where their grievances may be aired and then acted upon with
force (Becker, 2002). Only time will tell who the governing
authority will ultimately be.
Earth courts may eventually be the final authority, and Earth
governments may be another. But at the moment, the game owners are
effectively filling this role, with interesting implications. Their
power derives from the fact that every player who logs on to a game
accepts an End User Licensing Agreement (EULA) that strongly limits
their rights to affect events in the game world. Under Sony's
EverQuest EULA, every click and motion in the game is defined as
`uploaded content,' to which the player waives any and all rights of
control. A player could therefore develop in-game assets worth
hundreds of thousands of dollars, have those assets wiped out by a
coding error, and have no recourse for damages. To handle such
issues, the game companies put significant resources into their
customer service operations. Mythic Entertainment (developer of Dark
Age of Camelot) formally appointed a "Player Representative" to act
as a customer service spokesperson. She expressed the state of
affairs clearly in a discussion board post:
"Any one issue might have several viewpoints, all of which are
probably represented within the company itself. I can understand
the frustration that people feel when they don't hear anything
about their pet issue (because I feel it myself), but the fact is
it doesn't get discussed publicly until a decision has been made.
Games are not democracies. SOMEONE has to drive, and as I've said
on several boards, I as the player representative do not drive
the Good Ship Mythic, I am merely the most annoying backseat
driver ever. The only `votes' are called dollars. If you aren't
having fun, you shouldn't be playing." (Sanya Thomas, at
player2player.net/forums/ on June 6, 2002.)
Evidently, game owners are dictators whose benevolence depends only
on the constraint that they must remain profitable.
This power structure has predictable effects. In every game
currently on the market, the owners consider it their right to
introduce changes to game mechanics at any time, without prior
consultation with the players. As a result, avatars can have their
real market value destroyed overnight, without warning. The only
option for players is to complain loudly at various fansite
discussion boards, and the players make use of this privilege
zealously. A typical board (i.e. eqvault.ign.com) is flooded every
day with arguments, suggestions, and pleas, of a breathtakingly
varying quality, about every aspect of the game. Any change to the
game is immediately met with howls of protest from those damaged
most; those who gain, typically, say nothing because they are in the
game, enjoying their new benefits. Game owners occasionally seem to
pay attention to these forums, which must represent only the tip of
the iceberg of player input in the form of emails and other
communications. The net result is that the political structure of
every virtual world consists of a group of all-powerful executives
surrounded by mobs of angry, harassing supplicants.
As an example of ongoing governance problems, consider foreign trade
policy, currently one of the most pressing issues facing this
polity. By `foreign trade' is meant the common practice of selling
in-game items for real money in out-of-game markets. This trade is
simple to conduct and hard to detect. If Castronova has an avatar
that owns a Flowing Black Silk Sash in EverQuest, he may go to his
neighbor Bird and sell the sash to him for $100. Bird simply gives
$100 to Castronova, and then both return to their computer rooms,
launch their avatars in EverQuest, and meet at some pre-assigned
place in the virtual world. Once there, Castronova's avatar gives
Bird's avatar the sash, completing the transaction.
This practice puts game owners in a quandary. On the one hand, all
transactions like this improve the well-being of both parties, and
therefore make their enjoyment of the game greater. They are happier
customers. On the other hand, widespread foreign trade can ruin the
ambience of the game world. Most games seek to give the player a
rags-to-riches experience, but the satisfaction of that experience
can be significantly lessened if one observes that other players,
who ought to be poor like oneself, are instead very well arrayed in
expensive equipment that they bought for hundreds of dollars outside
the game. Foreign trade therefore erodes the equality of opportunity
of game play, and damages the entire gaming environment; the
situation is a commons tragedy, where the self-interested trading
behavior of individuals destroys the game's atmosphere, to the
detriment of all. Whether or not to allow foreign trade therefore
involves deep questions about the purpose of the game, the desired
atmosphere, and the interests (economic and emotional) of all the
players.
The game companies have taken varying stances, from formally
outlawing the practice, with and without serious enforcement
efforts, to complete laissez faire, and policy pronouncements in
this arena have had dramatic effects on the value of assets and the
quality of the gaming atmosphere. One company's efforts to control
foreign trade did produce a wonderful gaming atmosphere, but
resulted in a formal court action by market- oriented players
(Becker 2002). Without taking a position on this and other cases,
one thing is clear: foreign trade policy has certainly been imposed
on the people rather than with the people.
To anyone versed in political history, it should be no surprise that
the game companies have made themselves vulnerable by approaching
these matters as customer service issues rather than governance. In
their own minds, the players are not customers, but citizens, with
corresponding rights. Indeed, "A Declaration of the Rights of
Avatars" has already been proclaimed (see Raph Koster's work at
www.legendmud.org/raph/gaming/index.html). Little wonder, then, that
player-company relations tend to be very tense, even in the best
games. [17] There seems to be some possibility that game company
autarchs may follow Frederick the Great into the dustbin of
history. The customer service state, like all benevolent despotisms,
suffers from illegitimacy.
On the other hand, unlike Frederick the Great, a game company must
make decisions that meet the profit test. And while the players may
be powerless within the game, they are not serfs. They have both
voice and exit as options for resistance. Thus, survival in the
competitive world of gaming requires that a company remain popular
with its gamers. Ironically, increasing freedom of movement of labor
and capital on earth has already forced earth governments to compete
with one another to induce people to remain under their
jurisdiction. A similar process seems to be occurring with game
governments, where cross-jurisdictional mobility is already quite
liquid. Perhaps the future will see earth governments and game
governments in competition with one another. A Darwinian struggle
for jurisdictional reach might provide an outstanding system of
checks and balances, especially considering the ease of movement in
cyberspace.
The net results of this jurisdictional competition are very hard to
predict. It seems most likely that populations will sort according
to tastes, with those who desire some voice in their affairs seeking
more democratic forms of game governance. Those who want a
non-market, equality-of-opportunity game world will be able to seek
that out; those who wish to buy and sell their way to the top will
find an arena that suits those tastes. Overall, however, it seems
likely that constitutional issues will be important for some time.
VII. Conclusion: On the Uniqueness of Virtual Economies
This paper has attempted to describe some of the unique features of
economies in virtual worlds. Living in these worlds involves a leap
into a fantasy existence, something that humans have apparently been
trying to do since the dawn of civilization. The demand for game
time can be expressed in a simple economic model, and it seems to
have increased as the immersive satisfaction available from gaming
technology has increased. If this pattern continues, the advances of
the information age could make gaming a significant aspect of the
lives of millions of people. That scenario may have macroeconomic
implications, as well as some effects on government policy.
A common theme throughout the paper is that the analysis of virtual
economies will require slightly different tools and approaches than
we are used to. The differences are dictated by the specific
features of life in cyberspace. In virtual worlds, the entire
physical universe is open to direct and costless manipulation by the
owners of the game. The human beings behind the avatars are real,
and physical, and subject to the laws of Earth, but the avatars
themselves do not inherently face any physical constraints at all.
The discovery and description of avatar-mediated economic life
represent the most important current research avenues in the
economics of games.
Indeed, further thinking about some of the topics in the preceding
sections reveals a number of areas in which the behaviors and
outcomes that we generally take to be standard in Earth economics do
not seem to hold in avatar economies. Some examples:
· Economics, on Earth, argues that no wise government will try to
control prices. In an avatar economy, however, the government can
effortlessly peg many prices at any value. Since the goods are
digital, they can be costlessly created anddestroyed. Hence price
ceilings create no excess demand, and price floors no excess
supply. It may make sense to control some prices.
· Economics, on Earth, assumes that work causes disutility. In an
avatar economy, however, it is lack of work that causes
disutility. Regardless of earnings and loot rates, people who
play games must have something to do or they will be bored. If a
game structure limits their ability to be meaningfully engaged in
some mission, quest, or activity, they will be unhappy. Work is
good.
· Economics, on Earth, believes that economic growth is always
good. In an avatar economy, however, increases per-capita wealth
- which make it easier to accomplish various quests and missions
- which make it easier to accomplish various quests and missions
- will lower the challenge level of the game, potentially making
- will lower the challenge level of the game, potentially making
it a less interesting puzzle. Growth can be bad.
· Economics, on Earth, takes the population of humans as fixed,
and also assumes that their tastes and initial abilities are
fixed. In an avatar economy, however, people are free to choose a
significant subset of their abilities. They also can choose when
to be alive and when not to be, as well as how many different
people to be. The choosing economic agent can be a fairly complex
entity.
These examples present a number of puzzles for economic research. It
should be possible to generate fairly simple theories and arguments
explaining why things do seem somewhat different in virtual
economies than they do in the Earth economy. As those arguments are
made, we will learn more about the things that are the same in all
economies, both virtual and Earthly: the true nature of human
motivation and well-being, and their true relationship to objects in
the immediate physical world.
References
Au, Wagner James (2002), "Playing Games With Free Speech,"
Technology and Business, salon.com, May 6.
Becker, David (2002), "Game Exchange Suit Goes to Court," CNET
News.com, February 7.
Borges, Jorge Luis (1962), "The Lottery in Babylon," translated by
John M. Fein, in Borges, Labyrinths: Selected Stories and Other
Writings, New York: New Directions Publishing.
Castronova, Edward (2001a), "Virtual Worlds: A First-Hand Account
of Market and Society on the Cyberian Frontier," CESifo Working
Paper No. 618, December. _______ (2001b), "Achievement Bias in
the Evolution of Preferences," Gruter Institute Working Papers on
Law, Economics, and Evolutionary Biology, Volume 2.
Easterlin, Richard A. (2001), "Income and Happiness: Towards a
Unified Theory," Economic Journal, 111, 465-484.
Eco, Umberto (1989), Foucault's Pendulum, translated by William
Weaver, New York: Harcourt Brace Jovanovich.
Engwall, Lars (1994), "Bridge, Poker, and Banking," in Donald
E. Fair and Robert Raymond, eds., The Competitiveness of Financial
Institutions and Centres in Europe, Dordrecht: Kluwer Academic
Publishers, 227-39.
Johnson, Steven (2002), " Wild Things," Wired, March.
Kaplan, Carl S. (2001), "Florida Community Can't Shut Down 'Voyeur
Dorm,'" New York Times, October 5.
Kurzweil, Ray (1999), The Age of Spiritual Machines, New York:
Penguin Books.
Liebowitz, S.J. and Stephen Margolis (1994), "Network Externality:
An Uncommon Tragedy," Journal of Economic Perspectives 8(2),
133-150.
MacDonald, Glenn M. (1988), "The Economics of Rising Stars,"
American Economic Review, 78(1), 155-66.
Metrick, Andrew (1995), "A Natural Experiment in `Jeopardy!"
American Economic Review, 85(1), 240-53.
Mazalov, Vladimir V., Svetlana V. Panova, and Mojca Piskuric
(1999), "Two-Person Bilateral Many-Rounds Poker," Mathematical
Methods of Operations Research 49(2), 267-82.
Nash, John F. and Shapley, L. S. (1997), "A Simple Three-Person
Poker Game," in Mary Ann Dimand and Robert W. Dimand, eds., The
Foundations of Game Theory, Volume II, Cheltenham: Elgar Reference
Collection, 13-24.
Nichols, Mark W. (1998), "The Impact of Deregulation on Casino Win
in Atlantic City," Review of Industrial Organization, 13(6),
713-26.
Page, Scott E. (1998), "Let's Make A Deal," Economics Letters
61(2), 175-80.
Shubik, Martin (1999), "The `Bridge Game' Economy: An Example of
Indivisibilities," in Martin Shubik, ed., The Selected Essays of
Martin Shubik, Cheltenham: Elgar, 184-187.
Simon, Herbert A., and Jonathan Schaeffer (1992), "The Game of
Chess," in Robert J. Aumann and Sergiu Hart, eds., Handbook of
Game Theory With Economic Applications, Amsterdam: Elsevier, 1-17.
CESifo Working Paper Series
686 Hyun Park and Apostolis Philippopoulos, Can Poductive
Government Spending be the Engine of Long-Run Growth When Labor
Supply is Engogenous?, March 2002
687 Jonathan P. Thomas and Tim Worrall, Gift-Giving, Quasi-Credit
and Reciprocity, March 2002
688 Barbara Buchner, Carlo Carraro, Igor Cersosimo, and Carmen
Marchiori, Back to Kyoto? US Participation and the Linkage between
R&D and Climate Cooperation, March 2002
689 Amihai Glazer and Vesa Kanniainen, The Effects of Employment
Protection on the Choice of Risky Projects, March 2002
690 Michael Funke and Annekatrin Niebuhr, Threshold Effects and
Regional Economic Growth - Evidence from West Germany, March 2002
Regional Economic Growth - Evidence from West Germany, March 2002
691 George Economides, Apostolis Philippopoulos, and Simon Price,
Elections, Fiscal Policy and Growth: Revisiting the Mechanism,
March 2002
692 Amihai Glazer, Vesa Kanniainen, and Mikko Mustonen, Innovation
of Network Goods: A Non-Innovating Firm Will Gain, March 2002
693 Helmuth Cremer, Jean-Marie Lozachmeur, and Pierre Pestieau,
Social Security, Retirement Age and Optimal Income Taxation, April
2002
694 Rafael Lalive and Josef Zweimüller, Benefit Entitlement and
the Labor Market: Evidence from a Large-Scale Policy Change, April
2002
695 Hans Gersbach, Financial Intermediation and the Creation of
Macroeconomic Risks, April 2002
696 James M. Malcomson, James W. Maw, and Barry McCormick, General
Training by Firms, Apprentice Contracts, and Public Policy, April
2002
697 Simon Gächter and Arno Riedl, Moral Property Rights in
Bargaining, April 2002
698 Kai A. Konrad, Investment in the Absence of Property Rights:
The Role of Incumbency Advantages, April 2002
699 Campbell Leith and Jim Malley, Estimated General Equilibrium
Models for the Evaluation of Monetary Policy in the US and Europe,
April 2002
700 Yin-Wong Cheung and Jude Yuen, Effects of U.S. Inflation on
Hong Kong and Singapore, April 2002
701 Henry Tulkens, On Cooperation in Musgravian Models of
Externalities within a Federation, April 2002
702 Ralph Chami and Gregory D. Hess, For Better or For Worse?
State-Level Marital Formation and Risk Sharing, April 2002
703 Fredrik Andersson and Kai A. Konrad, Human Capital Investment
and Globalization in Extortionary States, April 2002
704 Antonis Adam and Thomas Moutos, The Political Economy of EU
Enlargement: Or, Why Japan is not a Candidate Country?, April 2002
705 Daniel Gros and Carsten Hefeker, Common Monetary Policy with
Asymmetric Shocks, April 2002
706 Dirk Kiesewetter and Rainer Niemann, Neutral and Equitable
Taxation of Pensions as Capital Income, April 2002
707 Robert S. Chirinko, Corporate Taxation, Capital Formation, and
the Substitution Elasticity between Labor and Capital, April 2002
708 Frode Meland and Gaute Torsvik, Structural Adjustment and
Endogenous Worker Recall Probabilities, April 2002
709 Rainer Niemann and Caren Sureth, Taxation under Uncertainty -;
709 Rainer Niemann and Caren Sureth, Taxation under Uncertainty -;
Problems of Dynamic Programming and Contingent Claims Analysis in
Real Option Theory, April 2002
710 Thomas Moutos and William Scarth, Technical Change and
Unemployment: Policy Responses and Distributional Considerations,
April 2002
711 Günther Rehme, (Re-)Distribution of Personal Incomes,
Education and Economic Performance Across Countries, April 2002
712 Thorvaldur Gylfason and Gylfi Zoega, Inequality and Economic
Growth: Do Natural Resources Matter?, April 2002
713 Wolfgang Leininger, Contests over Public Goods: Evolutionary
Stability and the Free- Rider Problem, April 2002
714 Ernst Fehr and Armin Falk, Psychological Foundations of
Incentives, April 2002
715 Giorgio Brunello, Maria Laura Parisi, and Daniela Sonedda,
Labor Taxes and Wages: Evidence from Italy, May 2002
716 Marta Aloi and Huw Dixon, Entry Dynamics, Capacity Utilisation
and Productivity in a Dynamic Open Economy, May 2002
717 Paolo M. Panteghini, Asymmetric Taxation under Incremental and
Sequential Investment, May 2002
718 Ben J. Heijdra, Christian Keuschnigg, and Wilhelm Kohler,
Eastern Enlargement of the EU: Jobs, Investment and Welfare in
Present Member Countries, May 2002
719 Tapio Palokangas, The Political Economy of Collective
Bargaining, May 2002
720 Gilles Saint-Paul, Some Evolutionary Foundations for Price
Level Rigidity, May 2002
721 Giorgio Brunello and Daniela Sonedda, Labor Tax Progressivity,
Wage Determination, and the Relative Wage Effect, May 2002
722 Eric van Damme, The Dutch UMTS-Auction, May 2002
723 Paolo M. Panteghini, Endogenous Timing and the Taxation of
Discrete Investment Choices, May 2002
724 Achim Wambach, Collusion in Beauty Contests, May 2002
725 Dominique Demougin and Claude Fluet, Preponderance of
Evidence, May 2002
726 Gilles Saint-Paul, Growth Effects of Non Proprietary
Innovation, May 2002
727 Subir Bose, Gerhard O. Orosel, and Lise Vesterlund, Optimal
Pricing and Endogenous Herding, May 2002
728 Erik Leertouwer and Jakob de Haan, How to Use Indicators for
`Corporatism' in Empirical Applications, May 2002
729 Matthias Wrede, Small States, Large Unitary States and
Federations, May 2002
730 Christian Schultz, Transparency and Tacit Collusion in a
Differentiated Market, May 2002
731 Volker Grossmann, Income Inequality, Voting Over the Size of
Public Consumption, and Growth, May 2002
732 Yu-Fu Chen and Michael Funke, Working Time and Employment
under Uncertainty, May 2002
733 Kjell Erik Lommerud, Odd Rune Straume, and Lars Sørgard,
Downstream Merger with Oligopolistic Input Suppliers, May 2002
734 Saku Aura, Does the Balance of Power Within a Family Matter?
The Case of the Retirement Equity Act, May 2002
735 Sandro Brusco and Fausto Panunzi, Reallocation of Corporate
Resources and Managerial Incentives in Internal Capital Markets,
May 2002
736 Stefan Napel and Mika Widgrén, Strategic Power Revisited, May
2002
737 Martin W. Cripps, Godfrey Keller, and Sven Rady, Strategic
Experimentation: The Case of Poisson Bandits, May 2002
738 Pierre André Chiappori and Bernard Salanié, Testing Contract
Theory: A Survey of Some Recent Work, June 2002
739 Robert J. Gary-Bobo and Sophie Larribeau, A Structural
Econometric Model of Price Discrimination in the Mortgage Lending
Industry, June 2002
740 Laurent Linnemer, When Backward Integration by a Dominant Firm
Improves Welfare, June 2002
741 Gebhard Kirchgässner and Friedrich Schneider, On the Political
Economy of Environmental Policy, June 2002
742 Christian Keuschnigg and Soren Bo Nielsen, Start-ups, Venture
Capitalits, and the Capital Gains Tax, June 2002
743 Robert Fenge, Silke Uebelmesser, and Martin Werding,
Second-best Properties of Implicit Social Security Taxes: Theory
and Evidence, June 2002
744 Wendell Fleming and Jerome Stein, Stochastic Optimal Control,
International Finance and Debt, June 2002
745 Gene M. Grossman, The Distribution of Talent and the Pattern
and Consequences of International Trade, June 2002
746 Oleksiy Ivaschenko, Growth and Inequality: Evidence from
Transitional Economies, June 2002
747 Burkhard Heer, Should Unemployment Benefits be Related to
Previous Earnings?, July 2002
748 Bas van Aarle, Giovanni Di Bartolomeo, Jacob Engwerda, and
Joseph Plasmans, Staying Together or Breaking Apart:
Policy-makers' Endogenous Coalitions Formation in the European
Economic and Monetary Union, July 2002
749 Hans Gersbach, Democratic Mechanisms: Double Majority Rules
and Flexible Agenda Costs, July 2002
750 Bruno S. Frey and Stephan Meier, Pro-Social Behavior,
Reciprocity or Both?, July 2002
751 Jonas Agell and Helge Bennmarker, Wage Policy and Endogenous
Wage Rigidity: A Representative View From the Inside, July 2002
752 Edward Castronova, On Virtual Economics, July 2002
Footnotes
[1] A rough accounting as of June 2002, based on media reports and
company claims: Lineage, 4 million; EverQuest, 400,000; Ultima
Online 200,000; Camelot, 200,000; Anarchy Online 200,000;
Asheron's Call 150,000. This does not include any number of
chat-based games and some smaller titles that exist. On the other
hand, many people have accounts in several games. No one knows how
many people are actually active in game worlds, but the number
appears to be substantial.
[2] Some of the concepts and ideas in the paper may seem unusual
to readers who are not familiar with the basic aspects of the
online gaming world; my earlier paper would be a decent
introduction (Castronova, 2001a). The one finding of that paper
that deserves added emphasis here is that players in virtual
worlds have developed durable assets of considerable economic
value. On a per capita annual basis, the production of new value
(in terms of both durable equipment and avatar capital, i.e. the
skill set of the avatars) is on par with that of a moderately
advanced industrial country. The pseudo-GDP of Norrath amounted to
as much as $2,000 per capita annually. There is also a substantial
dollar-based trade in goods, as well as a liquid market in
currencies. In short, even a brief and limited empirical
assessment revealed evidence of real economic activity, both
within online virtual worlds, and between virtual worlds and
earth. The present paper takes this economic activity as a given,
and tries to explore some of its broader implications.
[3] Information on Vishnu and other Hindu teachings from the
Columbia Encyclopedia, 6e.
[4] Most of this information is general knowledge; some of the
specifics, especially dates and names, come from James Masters'
online guide to traditional games
(http://www.tradgames.org.uk). The lines of influence are not
direct or causal; they represent my own beliefs about what
elements in the culture seemed to allow the next step in gaming
development.
[5] There are two strange coincidences in this history. First:
Chip Morningstar, an inventor of Habitat, coined the term "avatar"
to refer to the 2D cartoon figures that would be used to represent
users in the Habitat environment. He did so apparently unaware
that Habitat's ultimate ancestor is moksha-patamu, the game that
illustrates the Hindu virtues and vices. As legend has it, those
virtues and vices first came to humanity's attention as such when
they were revealed to us by Krishna, who was himself an avatar of
Vishnu. Thus, the concept of "avatar" in current games seems to be
have appeared without any prior consciousness of the historical
association of these games with a real Hindu avatar. Second: Gygax
and Anderson, the inventors of Dungeons and Dragons, made heavy
use of the concepts of character classes and levels, and these
concepts continue to play a very important role in contemporary
games. Players choose a class (a type of person to be) and then
try to raise their level (their competence or human capital) by
devoting time to the development of skills that are specialized to
that class. This advancement structure
[6] We cannot know for sure whether game participation is higher
on a per capita basis today than in 2500BC. However, it does seem
to be the case that children today spend more time playing video
games than children of an earlier era spent playing games like
Monopoly.
[7] Umberto Eco's Foucault's Pendulum (Eco, 1989) makes a fairly
simple point: If everyone believes in some conspiracy theory, it
is possible for society to make it true, for all intents and
purposes. Widespread belief in the theory imposes social
constraints that eradicate all behavior inconsistent with the
theory. Simple self-interested incentives could ensure, for
example, that no one would ever doubt a theory stating that
Martians came to earth in 1800 and decreed that Americans would
drive on the right side of the road while Britons would drive on
the left. Anyone attempting to live at odds with the theory would
be killed right off. The broader point is that the truth and
reality are slippery concepts. Jorge Luis Borges' "Lottery in
Babylon" (Borges, 1962) uses Game as a metaphor for this social
process: the lotto begins as a game but it becomes social life in
toto. My point in bringing this up is not to argue that Truth and
Reality do, or do not, exist distinctly from Fantasy and Game. My
point is that the fluidity of these concepts in actual human minds
may (indeed already do) allow millions of people to slip fairly
easily from one world to another. Friday's accountant is
Saturday's wizard. This behavior has observable economic, social,
and political consequences, for people on either side of these
lines.
[8] In June 2002, I searched the Econlit database (which covers
for articles in economics, political science, public policy, and
elsewhere) for the following terms: checkers, chess, go (in titles
only; `go' in keywords brings too many hits), landlord's
game/darrow (`monopoly' returns too many hits), jeopardy, let's
make a deal, backgammon, cribbage, tetris, contract bridge
(`bridge' returns too many hits), yahtzee, tomb raider, sim city,
euchre, pac-man, trivial pursuit, myst, craps, poker, blackjack,
slots/slot machines, and horse racing. The results: zero hits for
all games except: chess (2), jeopardy (1), let's make a deal (1),
contract bridge (1), poker (2), slots (2), and horse racing
(14). The seminal work on chess (Simon and Schaeffer, 1992) argues
persuasively that games as complex as chess are not usefully
studied from a von Neumman - Morgenstern game theory perspective:
studied from a von Neumman - Morgenstern game theory perspective:
there are so many nodes in the tree that it is impossible to make
an exhaustive assessment of the terminal value of any given
move. A massively multiplayer online roleplaying game like
EverQuest is infinitely more complex than chess; it is not even
clear what `victory' means. Beyond Simon and Schaeffer (1992),
few of the other papers address games qua games. The game-show
papers are fairly tongue-in-cheek analyses of the incentives posed
by certain aspects of these games (Metrick, 1995; Page, 1998). The
bridge and poker papers are in the vein of `Here is a phenomenon
that is a lot like bridge/poker,' not really analyses of the games
as actually played (Shubik, 1999; Nash and Shapley, 1997; Engwall,
1994; Mazalov, Panova, and Piskuric, 1999). The slots papers are
about gambling revenues (Nichols, 1998). Only the horse racing
papers amount to a legitimate literature on the game in question,
as actually played in real life. Yet horse racing is actually a
spectator sport, a subject for which we do have a well-developed
literature and journals (e.g. the Journal of Sports Economics). On
the whole, then, it is safe to say that social scientists simply
have never explored the games that people really play. (There does
seem to be a fairly large literature in the AI community.) The
oversight is especially glaring in the case of games like Sim City
and its spin-offs. I suspect that many of my colleagues in the
social sciences have played Sim City, enjoying the job of Big City
Mayor for an evening. Like them, it never occurred to me to ask
whether the fact that millions of other people also seemed to like
role-playing this job was worthy of further investigation. Nor did
it occur to me that this behavior, in itself, might reveal
something fundamental about the economic and social behavior of
people. The opportunity to make these investigations is only
growing, however; those mobs of pseudo-mayors will soon become
part of actual virtual cities in the Sims Online.
[9] The utility function enumerates the motivational strength of a
person's goals, but it does nothing more than that. It is a
numerical guide to what people will do. It is not a numerical
guide to what makes them feel good. And while it makes sense to
assume (as I do here) that the things that make people feel good
will also the things that people pursue, the converse does not
necessarily hold. People may well pursue things that do not make
them feel good. Let S be a satisfaction ordering, such that among
two states x and y, xSy implies x makes me happier than y. Let U
be a motivational ordering, such that xUy implies that I am
willing to pay more to obtain state x than state y. Then I think
it is reasonable to assume that xSy implies xUy. However, it is
not reasonable to assume that xUy implies xSy. Addiction is one
counterexample. Obsession with work and money is another
(Easterlin, 2001). In another paper (Castronova, 2001b), I argue
that there is nothing in cultural or biological evolution that
guarantees that the motivational orderings of human beings must
also be their satisfaction orderings. On the contrary, the process
of economic development introduces a systematic bias that points
our motivational orderings away from our satisfaction orderings.
[10] One implication of this framework that is worth exploring: a
competitive market in games will generally not produce games with
the ideal challenge level for a given player. Game content is
costly to produce, and maintaining both rewards (R) and the
challenge level (C) can only be done at some marginal cost. As
long as the marginal cost of challenge is positive, competitive
game companies will introduce challenge to the extent that its
marginal cost of production equals its marginal revenue to the
company. The marginal revenue must therefore be positive, which
would seem to imply that the marginal contribution of challenge to
emotional satisfaction must be positive. This will only happen at
values of C that are below . In competitive markets for puzzles,
all puzzles will be at least a little bit too easy.
[11] Pricing in MMORPGs is primarily a flat-rate monthly fee for
game access. Therefore, in the model, I ignore the one-time cost
of buying the game software and concentrate instead on the idea
that gaming must be purchased in units of time.
[12] One way of judging whether the Work Game of Earth is
entertaining is by counting how many people play it. By that
standard, it seems to be a very entertaining game. Indeed, it
seems to be especially fun for people in richer cultures. Cause
and effect are hard to sort out in this case, however.
[13] Perhaps the Turing Test will first be passed in a
game. Content developers have been focusing especially hard on the
artificial intelligence of software agents, with some success
(Johnson, 2002). University of Michigan computer scientist John
Laird has argued that games represent the forefront of AI
research.
[14] At the 2002 Electronic Entertainment Expo, developers at a
workshop on virtual worlds repeatedly insisted that the ongoing
customer support costs required to keep the world in existence
equaled or surpassed the entire development cost.
[15] This is the strategy of Project Entropia (Mindark) and
Neverwinter Nights (Bioware). 25
[16] The developers at E3, mentioned above, also asserted that no
virtual world could be developed for less than $15
million. Nonetheless, Mythic Entertainment developed the
successful world of Dark Age of Camelot for only $2.5 million. It
is no coincidence that the workshop speakers were representatives
from the very large players in this market (Sony,
Universal/Vivendi, Microsoft), who of course had every incentive
to quash expectations of success among the many tiny competitors
in the audience.
[17] Mythic Entertainment has made a very serious effort to remain
engaged with the player base of Dark Age of Camelot, but they have
been unable to avoid the basic pattern described above. The loss
of faith in the company does not stem from bad decisions, but from
the impossibility of endowing any kind of dictatorial decisions -
even good ones - with legitimacy.
--<cut>--
_______________________________________________
MUD-Dev mailing list
MUD-Dev at kanga.nu
https://www.kanga.nu/lists/listinfo/mud-dev
More information about the mud-dev-archive
mailing list