Why virtual economies defy the rules of your old college textbooks

Scarcity — it’s the first concept drilled into any beginning economics major. And economics is about the production, distribution and consumption of scarce resources.

But in virtual economies, one could give a farmer unlimited grain and cows. So given that very key difference, if you’re the creator and overlord of a fully-fledged virtual world, how do you go about managing it (economically speaking)?

That was the topic of a talk by Live Gamer chief technology officer Bill Grosso at The Virtual Goods Summit this week. I’ve embedded the presentation below. It offered basic insights into how game designers create environments where people are prone to spend more (not unlike how grocery store chains manipulate floor layouts to compel customers to make impulse purchases).

First, consider more of the key differences:

1) In the real world, there are multiplier effects — for example, if the government lowers tax rates, that means there’s not only more money in the hands of taxpayers. Consumers may also go out and spend that extra income, pumping capital into other businesses, which means the economy could grow more than if you just accounted for the initial tax cut.

But in a virtual economy, there are “sources” and “sinks,” Grosso says. In a virtual world, there are constantly new sources of virtual cash, like discovering a virtual treasure chest or the base amount of income you get when you join a game. To maintain a stable economy, game creators have to come up with “sinks” or ways of removing currency from circulation.

2) In virtual worlds, you have absolute control. You can control what people can buy and when they can buy it.

3) You have perfect information. You know about all transactions at all times. This is different from the real world, where economists try and approximate growth and unemployment.

4) Price testing is nearly frictionless. You can bucket test prices for items with different users. (This would be much more costly in the real world. Imagine if Wal-Mart tried to offer one-half of its customers one price and the other half a different price. Or even if they tried to change the price for a week to see what would happen. They’d have to go in and physically relabel everything.) In a virtual economy, you can do it instantaneously and you can randomize it.

And here’s an extra one …. 5) You can dynamically adjust prices based on real-time demand. (OK, you can do that in the real-world too with commodities, equities and so on — but it’s more difficult for tangible goods like ice cream.)

So what do you do with all these differences? You may have to artificially create scarcity, Grosso says.

  • Only release a limited amount of goods, or make them available only at a certain time.
  • Constantly create new goods that users can aspire to at different levels.
  • Create “wear and tear” on items so users have to replace them.
  • To prevent fraud, create “velocity” limits on virtual cash. This means you should allow people to cash out only up to a specific limit or a certain number of times a week.
  • Consider whether to allow a secondary market for goods, where players can trade amongst themselves. [Audio courtesy of Alexa Lee]
  • Create ultra-fine metrics. Instead of having an average-revenue-per-user measure, a game designer should know revenue from a specific person or demographic and adjust accordingly.
  • Look at transactions-per-user as a critical measure of health. E-mail users who aren’t buying or selling frequently. (This may not apply if your strategy is based on a high churn of users, which means that people come in and play for two weeks or so, then leave and are replaced by a new crop of users. In that case, Grosso says you want to maximize their initial cash-in.)
  • When doing A/B or bucket testing for prices, do them with different price sets on goods, rather than changing the price of an individual item.
  • Try and increase the number of transactions per user without lowering prices, so users will spend more.

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