Of Hammers and Scales
Economics and Crafting in MMO’s
As I indicated over at MMORPG, MMO’s are currently in a reflective period. We have had enough trial and failures that we are beginning to see established ideas questioned, old ideas revisited and new ideas attempted. In general, this is a good thing and a sign that the market segment is out of its post-WoW rut. However, during these periods of reflection we sometimes through out the good and bring in the bad. This Eorzea Reborn entry is a discussion of one area where some odd thinking is starting to manifest: the player driven economy and what makes it tick.
It’s no surprise that gear is a key part of the MMO. Fabled and exotic gear is as much a fundamental element of the hero saga as is the nemesis. What, for instance, would Arthur be without Excalibur?
The question in MMO’s is where should gear come from: crafting or adventuring. If we look at Tolkien’s work, we see both paths exemplified. Aragorn receives his sword, Anduril, after having it reforged from the shards of Narsil by elves at Rivendell. Similarly the rings of power were straight off a crafter’s forge. By contrast, “loot drops” also appear in Tolkien’s work, be it Gandalf’s sword Glamdring or Bilbo/Frodo’s Sting or Mithril Shirt. The point here is that the crafting and adventuring paths for gear acquisition are deeply seeded traditions for fantasy.
In MMO’s, we have seen the pendulum swing in each direction. Crafted favoring games predominated early on (UO) but were largely been replaced by loot drop systems with EQ. In recent times we’re seeing a bit more emphasis on putting the crafter on equal standing with the adventurer. Final Fantasy: A Realm Reborn is one such game, with crafting classes standing as separate paths for development alongside adventuring or gathering crafts. However, we always see a tension in MMO’s: should crafters make the best gear (Anduril) or should adventuring bring us the best gear (Excalibur)?
Player run economies are also back on the bandwagon, recognizing that some players simply like playing MMO merchanting and that games become more immersive when players are empowered to influence the transformation elements of the game system. I want to talk a bit about economic models and then return to the crafting vs. adventuring tension.
A Wonk-like word or two on Economics
So, a wonk-like discussion is one where a subject is studied extensively or thoroughly. I will note, up front, that I am not an economist. I do, however, work and am educated in a field derived from economics and I spend a good bit of my professional life dealing with vagaries of market efficiency. I mention this because, as I move forward, economists will undoubtedly find elements to quibble about. Rightly so, I’m going to paint with a broad brush here. The basics are fundamentally sound, but there are some details where I can certainly be picked at here.
First, lets talk about requirements for an efficient market. A market has potential for efficiency when you achieve three things:
- Competition wherein standardized, highly similar goods (commodities) are supplied by numerous suppliers, none of whom control so much of the market as to be able to distort it.
- A lack of information asymmetry. Information should be equally accessible and accurate. Both buyers and sellers should know who is in the market, with how much, for how much.
- Rational economic actors – people who engage in economic exchange with profit maximization in mind. Behavioral economists, finance and marketing types will note there are problems with this idea, but lets accept that people are at least profit seeking (as inBounded Rationality theory).
When these things happen, markets are incredibly efficient. Supply and Demand regulate Price and Quantity, achieving equilibrium. At equilibrium, transactions are processed efficiently with no extra economic baggage (externalities).
So, how often does this occur in the real world? Not very, in actuality. In highly commoditized markets (where all goods are more or less the same), we get pretty close to purely efficient markets. In most other markets (and market segments) we either have differentiated competition or small numbers of suppliers. That turns out to be not that big of a deal, though, most of the time. As long as we do a reasonably good job of avoiding information asymmetry, markets remain a reasonably powerful regulator of supply and demand even when the markets themselves are, at best, only semi-efficient.
The key is, it’s a very important thing for markets to approach efficiency even if they can’t reach full efficiency. In more efficient markets you are less likely to have unmet demand, you are less likely to see wasteful supply and you are better able to navigate peoples differing liquidity needs. The key with liquidity is that we all have different levels of cash and different time-driven needs for that cash. Some of us need money right now, so we dump goods at a lower price. That lower price can be picked up either by first order demand (someone who needs the product) or liquidity rich speculators (those who buy and hold waiting for a price fluctuation).
OK, you put me to sleep, can you talk about MMO’s again?
For the most part, MMO’s have done a horrid job of building efficiency useful tools into their economic model. I would say that, in large part, most early MMO’s didn’t have an economic model, so the lack of efficiency aiding tools is not all that surprising. What are efficiency aiding tools? They are the tools that help reduce information asymmetry. In the old days, this was achieved by having a common place to hawk goods (the East Commons Tunnel in EQ1) or the various Buy/Sell/Trade boards that used to be regular staples of MMO community forums. In some cases, these player created tools were amazingly complex as exemplified by the FFXI Auction House website. Seriously, this is a very impressive piece of work, if you haven’t seen it you should browse it.
More recently, these various tools have been mostly superseded with in-game auction houses. Even the least efficient AH systems give the buyer and seller some indication of who is currently in the market (the spot market). Better systems, like those in FFXI and GW2 give purchase history, helping both buyers and sellers estimate the volume and price points for demand. Optimal systems, like those in EVE and GW2 allow both buy orders and sell orders. Players can escrow some cash to automatically acquire items when they reach specific price points.
While I don’t really like GW2 game play, I’m a huge fan of the work they have done on their auction house. By taking the system cross-server, adding in buy orders and providing price history, they have created the most information rich economic system in a major MMO. There are very few opportunities for arbitrage and those that arise tend to be depleted very quickly. It’s a great system and it really should be the standard for MMO’s going forwards.
But that’s not what we’re hearing. Instead we’re hearing things like auction houses remove player interaction, player vendors are simply a better way to do things, and the price reducing aspect of information richness causes auction houses only benefit buyers.
To be blunt, these are all wrong conclusions. Either they over-generalize or they simply miss what’s happening in an economic exchange. In the “good old days” we did have to talk to other players to buy things, true. However, the vast majority of those social exchanges were nothing more than “I’ll take it.” Only on a specific type of exchange did you really see negotiation and haggling occur. That’s actually still happening in the auction house model. That FOOBLE OF CERTAIN DOOM listed for 10,000,000 platinum isn’t going to sell for that amount. That’s a seller listing a good with a “call me, maybe?” statement. That good is going to be part of a negotiated swap, and it should, it’s a non commodity rare item. Business don’t take time to get to know the manufacturers of their staples and paper clips and neither should players. When we need a commodity good, we buy it for whatever the best price available.
Player vendors on their own are a terrible idea. They increase information asymmetry leaving players to wonder who is selling what, where and for how much? Further, while there are a few people out there who really like browsing store to store looking for deals, many people on many types of exchange simply want one and done. That said, most people will look… for some items. The problem isn’t the auction house, once again the problem is the items. Redundant, standardized items land in the quick search bin. Specialized important items are worth shopping for. Actually, an auction house and player vendor system can easily coexist (see EQ2 as a starting point). An auction house can help buyers and sellers find the information they need while player vendors and housing can add a location impact to exchange. You accomplish this through speed of delivery and taxation, not by eliminating the means of identifying trade partners.
Information rich, efficient markets help buyers and sellers. While it is true that commoditized products (highly standardized, non differentiated, non substitutable goods) tend towards price only competition, information rich markets open the door to small, specialized, makers of differentiated goods. Sometimes its because large volume players miss market opportunities (e.g. Rovio or Spanx) and sometimes its because a market segment is just too small for a big player to focus on (e.g. the entire point of the Camelot Unchained pre-Kickstarter campaign). The point is, small and large suppliers can thrive in an information rich system.
MMO economies have a problem, unquestionably. Player driven economies are an admirable goal, certainly. However, the auction house is part of the solution, not the problem. MMO developers have two economic problems, a commoditization problem (too many, too similar items) and an oversaturation problem (just too damned many items altogether). Removing auction houses actually exacerbates these problems. In the next piece, I’m going to talk about these problems at length and offer some thoughts along the way on building an itemization system that complements a player driven economy without turning it into Crafters-R-Us.