[MUD-Dev] Economic model..

[Daniel.Harman at barclayscapital.com]

From: Michael Sellers [mailto:mike at onlinealchemy.com]

> Notice I said "easy arbitrage."  Arbitrage is at the heart of any
> viable market: you buy something for $ and sell it for $$.  But
> along the way (at least outside of modern currency and similar
> markets), some form of value is typically added: the form of the
> resource is changed, convenience or utility is increased, or in
> the most basic sense, the resource is made more local.  For
> example, if you mine some ore and then bring it to town to sell
> it, you've increased the ore's utility and convenience for others,
> and they are willing to pay some amount for that.

That's not arbitrage though, that's manufacturing. From a financial
perspective arb means :

A trading strategy that looks to take advantage of price differences
of the same security, currency or commodity, trading on different
exchanges. Since the onset of faster computers and communication
lines this trading strategy has become much more
difficult. Arbitrage trading may also refer to trading on price
differences between stocks and the underlying stock index options or
futures.

  http://www.investordictionary.com/finance/dictionary/define306.aspx

> However, in many games (and the Habitat cupie-doll incident is
> probably still the canonical version of this) what happens is that
> players are able to obtain some resource for no real cost and then
> sell it for an artificially inflated cost -- they've added no
> value or utility, increased no convenience, etc.  This quickly
> turns into a gameplay-killing treadmill (of the more literal sort,
> not the leveling treadmill) where you get money but feel no real
> reward -- this IMO is a large part of what's wrong with the
> quasi-crafting skill games in The Sims Online.  Further, if this
> injection of money is made from a limitless supply -- there's
> always someone to buy your goods at some inflated price -- then
> hyper-inflation is the inevitable result.

There are established methods to manage this type of problem from
the real world though. If its happening a lot then the transaction
cost is too low, and somehow the people forcing the price up have
been handed a monopoly. I would argue that this kind of arb is a
symptom of underlying problems in the economy and not the cause.

>> In Everquest, players moan about traders who buy up items
>> immediately from impatient sellers at a discount and then put
>> them back on the market for more. Is this more what you are
>> referring to? If so I don't even see that as proper arb, its
>> simply taking a position on the market.

> I really don't have a problem with that sort of thing; as you say
> it's just taking a position on the market.  Now imagine if you had
> a fluctuating import/export market as I described earlier, and
> could take future positions on a resource -- some very interesting
> market dynamics become available that could actually provide
> strong gameplay for players inclined this way.

Definitely, although encoding indicators so that people could
intelligently make investment decisions would be an interesting
challenge. Especially if you don't want it to be easily
gameable. Certainly possible though imho, but it might require
complex support systems such as farming etc.

>> Personally I'd love games to setup markets that took a few
>> lessons from the real world markets, and facilitated more complex
>> trading strategies. Its would add an interesting axis of
>> entertainment to the game. The first things to add would be
>> player leasing of ships/vehicles (required for goods transport),
>> insurance markets, contracts (should be limited so that humans
>> are not required to arbitrate), multiple exchanges with limited
>> memberships (creates arb opportunities), commodities markets
>> (with seasonal variations etc). Maybe I'm biased though because I
>> work in investment banking ;)

> I think you're right (and I'm not an investment banker).  The
> economic simulations in games thus far have been incredibly
> simplistic caricatures -- and more, I think, because the
> developers don't understand the gameplay dynamics that can be
> extracted from markets than because the players aren't interested
> in them.

> I'm not sure I'd want to unleash the full force of things like
> factoring or shorting in markets, as these can become quickly
> bewildering.  But having an actual basis for trade with localized
> goods, time/risk/cost to transport, costs and various forms of
> loss and "friction" in manufacturing -- these could all add an
> amazing component that gets beyond the eternal search for more
> phat l00t.

Shorting is pretty essential, without it you can't take a bearish
position on the market. Factoring is a lot trickier, as are all debt
driven mechanics. The only way to make any of them to work is to
permit only secured lending in game. Otherwise people will just
fraudulently close game accounts when things start to go wrong
whilst passing resources to their new characters. Allowing factoring
doesn't really work if you accept the limitation I suggest as people
will be leveraged well beyond their secureable borrowing
potential. Then again a LTCM type event in game might be quite
interesting to watch unfold ;)

Another great thing about implementing financial markets is that
players don't have to understand them fully to enjoy them. Just look
at the average Joe buying stocks - its no better than randomly
gambling if, but that doesn't stop people.

If one really wanted to go to town, and this probably wouldn't
appeal to many except me, you could offer live market data feeds at
protocol level and people could write trading tools. I'd love to
apply some strategies through an autotrader like that. The fact that
http://www.eqecon.com exists suggest that people are interested in
running technical analysis on in game prices so maybe it wouldn't be
as niche as one might think.

Dan
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