Economic system

Background or why the heck am I doing this?

• Advanced players give newbies high-powered items because the advanced players have more than they will ever need.
• Advanced players throw away items which a newbie would love to have because it is not worth the advanced player’s trouble to find a newbie to give it to.
• A newbie has nothing to offer a medium level player who in turn has nothing to offer an advanced player.
• Players continually hoard items increasing the size of the database.
• Players litter the world with old items which cannot be sold to free up space for new items.
• Players lose interest in the game because there is nothing left to acquire.
• Players resort to barter as the currency hyperinflates or disappears.
• Prices fluctuate wildly due to inefficient microeconomic institutions.
• Players can find the items they want for sale and can’t find buyers for the goods they have been encouraged to produce.
• Tragedy of the commons rules the public resources.

--Zachary Booth Simpson

I am sure you recognise some of those, because I do. According to the The In-game Economics of Ultima Online, this is "what happens when a game economy fails". The NWN economy is extremely flawed. And the reason is that it is based on single-player game economy, where the player is the center of the universe. Which actually also results in the fact that players expect that everything they do (or at least they are told that they should) is going to be rewarded with xp/items/money.

To ease the feel that it's the NWN that sucks, look at this:

Every game, I swear, EVERY GAME that allows players to make money in a multiplayer environment somehow gets its economy completely blown out of proportion.--MU

So, to answer the why-question, I'm adding yet another quote.

You can’t screw it up any worst than it already is. --Gordon Walton

This is what Gordon Walton said when Sam Lewis spoke about Economics theories and MMOGs

So, what is the problem? or the "Money Grows On Trees" syndrome

When a character logs in for the first time, he has very little coins. He can barely afford to buy adventuring equipment. Looking at how cheap a torch is, and how much it costs to take a drink at a tavern, or sleep for one night at an inn, and what the base price of a mundane short sword is, one can imagine what the real idea of the value of the money is. But soon enough, after adventuring here and there, the players acquire insane amounts of the gold coins (and items). They have more items and money than they know what to do with. Selling items becomes uninteresting, because you don't really need more money - thus a lot of players give their things to newbies, affecting the economy even more.

Have you ever wondered where all the gold coins come from?

This means that someone has found a sufficient quantity of the metal required to make these coins, mined it, smelted it, and minted it into a universally recognizable unit of trade. Barring duplication bugs and crooked administrators, the amount of this real money circulating around in any MMORPG seems to indicate that there are mountains of precious metals right near the surface (making it minable/pannable with pre-water pump technology). --MU

MUDflation typically occurs after additions to a game (such as with a major patch or expansion) leads to previously acquired resources losing value. For example, an expansion may lead to better quality items being introduced to the game economy which would cause the value of pre-existing items to diminish in value as they are less desirable and/or easier to acquire.

MUDflation also occurs with the continued operation of a game (as Raph Koster has discussed in his blog) as the sheer amount of gold coins and items that are continuously being mined and created should leads to its own result in hyperinflation (which is actually what happens in some MMORPGs). This situation is as bad as the one that we are facing in NWN.

This could be seen as part of an unlimited resources issue. If you wanted (and had enough money for it) you could buy 1,000,000 full plate armors, and this wouldn't affect the economy at all. The same goes for the instant-mining-ores that have been introduced in NWN2.

The Closed Economy and why it isn't a good solution

The Ultima Online tried this for a short time. What is a closed economy, then?

The world has a constant, finite number of resources. Let's say that to create a sword one needs 2 iron and 1 wood parts. When a sword is created (by a player, by NPC store, or dropped as loot), these resource parts are "removed" from the resource database. Only when the sword is destroyed are the resources given back and can be used into developing something else.

While this seems to be a reasonable solution, it really isn't. And here's why:

1) We don't really know what is a reasonable amount of resources for a world.

2) We don't really know what is a reasonable amount of resources for the amount of players we're going to have (and we don't really know how many players we're going to have.

3) Lack of incentives to spend resources leads to hoarding (which all players do more or less). Hoarding stops the resource cycle, binding precious parts in someone's backpack.

4) Eventually this leads into lack of resources and cash, no trade, and eventually a depression.

So, this totally opposite situation, creates opposite problems, which are just as bad.

How about a simulated market economy?

This should be a good solution, right?

Wrong

How about this situation?

A player gets a quest, which he does, and as a reward he gets a magical ring. Let's say that he already had an item that already gave him this ability, and that the ability is not stackable, or that he simple didn't need it, and just wants the money. So the player goes to a shop. But the shop-keeper already has a pile of similar rings (from others who finished that quest), and refuses to buy the ring.

By the player's point of view this is an unacceptable situation.

In this example you can already see the reason why simulation of market economy doesn't actually work - with the quest we have introduced a situation where everyone who finishes the quest (which sometimes is actually just everyone), have an item, rendering the said item worthless as a reward.

The same goes for creating algorithms for price fluctuations, to keep the amount of money, and inflation down. The problem with algorithms (and simulation) is the fact that they are just algorithms. They are more or less complex, more or less flawed, and don't change when the player tastes change.

The truth is, that "more or less complex, more or less flawed" is actually mildly put:

This method would require an incredibly sophisticated program moderating the various prices for all items in the economy, as well as the size of the money supply. Alternatively the game could have its own version of the Federal Reserve board, meeting once a month to set the “prime decay rate”. Both methods have a high probability of failure. --Sam Lewis

So, what do we do?

This is what we need, as described by Sam Lewis

• Monetary Policy – managing the money supply, to avoid hyperinflation
• Market Structure – creating a trading structure that lead to an interesting and engaging business game.
• Industrial Organization – creating crafting/business relationships, creation of goods (and services).

But first, cover some basics

• Economics – The study of how supply and demand allocates scarce goods and services in a society. Economics is typically broken into two fields of study
• Microeconomics – behavior and decision making of individual firms and consumers.
• Macroeconomics – behavior of the economy in the aggregate, focusing on nation production, inflation, unemployment and the role of government.
• Government – the governing authority. In MMO terms the government is the game developers. The NPCs within the game are their agents.
• Manufacturer – characters that make consumable and durable goods. In most games these are known as crafters.
• MMO Business Game – a game where the players are both consumer and producer of goods and services. Some markets might be served by NPC agents, but for this discussion an MMO business game is primarily a Play vs. Player game.
• Pareto Optimality – This is the standard that most economics use to measure the effectiveness of any economy. When an economy is Pareto Optimal then no redistribution of goods or services can make someone better off without making someone else worst off.
• Goal of Real World Economy – Achieve Pareto Optimality.
• Goal of MMO Economy – Support a “Fun” business game of trading and crafting. The game involves the selling and buying of goods and services between players.
• Relative Wealth – Players want to be on the top of the heap, therefore in a business game they want more cash/stuff than anyone else. This was expanded to include a comparison of assets, and liabilities, in effect a balance sheet.
• Conspicuous Consumption – Allow the players to purchase and display luxury goods (houses, clothing, pets, NPC followers). Many of these goods should not have an impact on actual game success. They just show others that the character has “money to burn”. Note that this solution not limited to displaying success in a business game. It is a typical means of displaying success in MMORPGs (I got this rubber chicken hat from this difficult quest, I am a level 65 Paladin, I can afford to dye my armor purple etc.).
• Balance Sheets/Net Worth statements – allow players to see the financial health of the character though some form of an income/balance sheet statement. This should be set up so that the player’s economic standing can “sliced and diced” like a traditional leader board (I am the 2nd wealthiest flizz producer on the shard). Again this is similar to how MMORPG leader boards work.

Monetary Policy

These are the goals:

• Sufficient cash for the economy, so that we don't go into depression an loose trades
• Avoid monetary collapse or hyperinflation where the currency doesn't become abandoned by the players
• New players aren’t “poor” - Players who come into an established game face high prices. They feel poor because they can't buy anything.

Money Supply

How is cash created (the Faucet)?

Cash is created through player-to-game exchanges:

• quest rewards
• loot
• direct payment by DM to a player for quest completion
• selling manufactured items to NPC vendors
• joining by new character

How is cash destroyed (the Drain)?

Cash is destroyed when players pay the game for a service or good:

• housing rent/food and similar
• item purchase
• fines for carrying contraband goods
• transportation
• character deletion

(credit to Synthetic Economist Chris Wolf who shared a TL;DR of his work on Quora)

The issues

The problem comes about when you have multiple faucets but few sinks. The players will always find a way to gain more money - i.e. go and grind killing monsters for loot leading to an infinite availability of funds (faucet). However the majority of MMO's don't require players to consistently utilize their resources on survival essentials - instead players use their resources on a finite number of items (sinks). This will eventually lead to hyperinflation (its a matter of when, not if).

• Note: One MMO that does a fairly good job of creating a good balance between faucets and sinks is Eve.

The possible solutions

• Reasonable financial rewards from hunting other creatures and robbing them
• Expensive component requirements for professional equipment
• Weapon/armor decay
• Taxes
• Market fees
• Natural Disasters
• Player Housing Auctions
• Special Auctions
• Timed resource spawning
• Lottery and state run gambling
• Indulgences
• Recycle bins
• NPC pawnbrokers

Reasonable financial rewards MU has interesting RL arguments for this. In our case, D&D doesn't promote giving players loot indiscriminately. The DMG has tables for both the amount of wealth a character at specific level should have, and loot tables per character level. Some kind of algorithm controlling the wealth of players could be introduced, but the downside to this idea is the fact that it can create grinding hysteria (I have already seen it happen with lowered XP).

Expensive component requirements This is something already used for projectiles like arrows/bolts/bullets and similar. It could also be incorporated for magical components for mages. Simple spells could be fixed by a cheap all-around component-pouch, and only specific spells would require specific components (D&D has also rules for that already). By controlling the components, we could control the usage of spells.

Weapon/armor decay This is expansion of expensive component requirements to other classes. Armors and swords used in battle should eventually break down (as they actually do in real life). This would require an upkeep cost (proportional to the item value) to keep the gear in order, otherwise the item will eventually break down (which will cost even more to repair). There should be a way for players with cheap equipment to be able to repair them themselves (newbie character for example with hide armor and a spear). Characters who know how to manufacture items, should of course also be able to repair them.

Taxes This does sound "not fun", however this is a really good money drain if it is made variable, and taxes were not that unusual in medieval times. Taxes we could implement are % ratio of PC-to-PC barter. This could be a sales commission used by player-owned NPC vendors. Another interesting idea is this one:

Taxes. Charge fees for maintaining a character in proportion to their property, income, or purchases. Although this would be fairly easy to implement, it is politically explosive.

- One corollary to this idea is to have imperfect tax enforcement. If players are randomly taxed (like an IRS audit) in proportion to their wealth there might be an interesting wealth gamble which takes place which reduces the overbearing perception of a tax. --Zachary Booth Simpson

Market Fees Specialized taxes for using marketplace-stalls

Natural disasters Clear out hoards with an occasional storm or quake.

Housing Auctions Instead of selling real-estates to players (or guilds and organizations) for standard fees, sell those on auctions.

Special Auctions Although not directly tied to economic activity, it is tied to the price levels in the game. This could be used for scarce resources that would be periodically auctioned to the player community. They could be:

• Resource spawn leases
• Hiring DM-run NPCs for special events
• Insurance against "natural disasters"

Timed Resource Spawning The idea is to have control over which resources go in and when.

lottery and gambling The game lets people to gamble with standard casino-odds. And with lottery, like any real-world lottery, rig the numbers so that it collects considerably more than it pays out.

Indulgences Services such as "red hair die" (from Ultima Online) and other Conspicuous Consumption.

Recycle bins Probably one of the simplest forms of drain. A player throws away an item (that is destroyed), and thus the value and the resources dissappear from the game.

NPC pawnbrokers The only way for a PC to sell their items "back to the game" is through NPC pawnbrokers, who don't pay that much, and resell them to other players at a substantial markup.

Controlling Hyperinflation

Consumables are important in creating new Cash – If large amounts of new cash can be created without consumables, then there is no economic brake on cash creation.

• Players set the prices of Consumable – This is the other side of the coin, since only player set prices can legitimately respond to changes in the money supply. Attempting to do this programmatically in such a diverse economy as a typical MMO is to invite failure. National governments have not been able to do this.
• Fixed drains need to be in place – This provides a mechanism to remove a Crafter who is economically irrational from the business game, as well as to provide equilibrium in prices and money supply. Thus a regular fixed cash fee for doing business is required, and set by the game.
• Variable Drains via percentage commission of the sale need to be in place – This provides a damper that mitigates wild swings in the money supply. Fictionally Sales commissions provide this damper. The percentage is set by the game, on Facility Type basis. --Sam Lewis

Controlling Deflation

Deflation is a problem, when the market has been flooded by items, and there is not enough cash/characters to buy them. One way to fix it is to have item and facility decay (already mentioned above). However, this in itself isn't the only solution. In Ultima Online-like tradeskill systems (similar to many developed for NWN before HotU), the characters advance their skills by creating items. Thus markets are full of low level value items that have no real customers. As long as we stay away from such systems (and keep with our own, where item creation isn't connected to the skill advancement) the item decay should be enough. For more detail see Over Production further down.

How to help starting characters

In a system based upon dependencies between player crafters, and player trades the starting characters are at big disadvantage (especially when the prices are fluctuating). The typical solution is then to raise the starting-cash, but it adds to the inflation.

Better solutions are these:

• Have NPCs provide basics (this is usually already used by most servers). Low level items are obsolete when the player advances (and nobody else is really interested in selling those). And the characters don't become players in the market until they get enough cash, anyway.

• Give the new character a valuable commodity, that the elder players are dependent on. (The same could be applied for middle-level characters and high-level characters).

An example of this was using Spider Silk from EQ. spider Silk only dropped from low level spiders, but needed for high level crafting. Thus low level players, who naturally were hunting spiders, provided spider silks at the market rate, readily getting enough cash to purchase items for themselves. --Sam Lewis

Market Structure

Real world market economy strives to achieve Pareto-optimality - a perfect competition where there are no real winners and looser. In a game with perfect competition, all players are price takers and there are no opportunities for arbitrage, cornering the market, and so on. As our goal is to have a fun game, not a perfect market economy we should strive for an "imperfect system". But we do not want a too imperfect system either (original system of EQ would be close), where the economy becomes so inefficient that only the most driven players want to participate.

The answer is to create oligopolies:

• Numerous buyers and few sellers
• Close substitutes
• Imperfect info
• Transition cost in time
• Moderate cost of entry

How to achieve oligopoly in a business game?

Numerous Buyers and few Sellers

Numerous buyers and few sellers for a good at any one time could either be achieved by fragmenting the sellers by location or by time. For example, not having a specific marketplace where PCs can sell their goods. Not offering NPC-vendors makes it only possible to buy things from players who are online right now. WoW has offers for limited periods only. One problem with fragmenting the sellers is that you can end up with fragmenting the buyers. We want to consolidate our buyers instead, either by location or by time, which can be done by letting the buyers get the information about the sellers. For example by providing server-wide info (but the player has to do something to get it - like making a PC go to a certain spot and read it).

An alternative to this is to limit the number of people allowed to provide the particular good (but this might become too rigid), or control the amount of good available at any one time by making key components drops extremely rare, or limited.

Close Substitutes

We want to make sure that crafters have some means of creating items that are similar, but not identical. The simplest way is to allow the PCs to create the same goods in different colors.

Imperfect Info

Funny enough, this is in conflict with few sellers/many buyers, but it allows players for interesting game behaviors. Willingness to spend time in analyzing the market, should be awarded with the possibility to gain advantage on their competitors.

Transition Cost in time

This has to be well-balanced. We should make sure that it is expensive (in time, not money) for the PC to compare prices and change vendors. This makes advertising, and location an important part of the business game. But if the cost is too high, the buyers will get frustrated and opt out (they even might stop playing the game altogether).

Moderate Cost of entry

Make it possible for PC to be really good at only one crafting profession (and make it hard or impossible to switch). If location is important for success (with high cost for the right locations, if they are not already owned by others), make it possible for those without the perfect location to compete by help of advertising.

Other structures

Since we want the characters to compete with each other, we need to give them a platform for that. For that we need to use marketing principles that will help with defining strategic position of the product in the game marketplace. Marketing strategies are divided into what are known as the 4Ps. (The characters can and should take advantage of our "flawed" economic structure) and 7Ps.

• Product - Create competition through product differentiation, for example by items having stats that are differently valued by different classes. Other ways of differentiation of products are:
• Effectiveness - tradeoffs in rate, damage, recharge time, as well as making the item superior for specific situations, while reducing its effect for general use.

• Esthetics - Making it look different, via color or shape.
• Fashion - This is a bit different from aesthetics, in that the player's decide what is fashionable and what is not.
• Scarcity - just simply making the item rare.

• Place - Create competition through locations where the goods are offered for sale, for example by having characters hire or own specific locations. On the other hand, a bazaar (a centralized market place) are good to lower transaction cost and get more buyers, but it reduces opportunity for competition based on location of the seller.
• Promotion - In other words advertising - possibility for advertising on forums, services offered in game (broker or auction house systems). Other mechanisms that could help players in promotion could be branding crafting goods with the crafter's name and signage for stores.
• Price - An easy one to understand. But if NPC vendors buy and sell the same items, then the price competition is restricted. This is usually the last resort after the other three Ps.

Industrial Organization

In this part we deal with how goods and services are produced and brought to market.

In NWN2 the player can both be crafter and adventurer (but in some other games the split is hard). A typical relationship is this:

• Adventurers sell raw materials.
• Others supply sub-components
• Crafter creates the final product
• Sells the items to adventurers.

Note that the relationship does not show services. Buff for money is a typical service.

Manufacturing Chain

We should set up the Manufacturing Chain of Crafters and Resource Gatherers so that crafters are not independent. This means that crafters should have items to sell both to adventurers and as sub components for other crafters.

Throughout the entire Manufacturing Chain, the crafters should compete with each other based on the 4 Ps.

Over Production

There is only so many consumers for a +1 sword. Once all the players have one, there is no more market. Every time a character gets a sword, he is no longer a potential customer. And if he in turn can sell the sword to someone else when he gets a better one, an entire chain of potential customers has been killed. We end up with Oligopsony (many sellers and few buyers) structure and in worst case scenario the demand can be killed. This is pretty much the same situation as Deflation.

Ideas to solve this problem, include:

Attunable Items This solution has few real world analogies, but is already being used by games such as EQ and WoW. Through some in-game process the item attunes itself with the character, and once attuned it can't be used by anyone else, nor sold. A milder version of this can be found in the diamond wedding ring industry, where there is a stigma against buying used wedding rings. This helps against the market for used goods.

Obsolescent Through Monty Hall

In business game the developers could constantly add new manufacturing items that are superior to the items that are currently created.

Item Decay

This insures that the market is never saturated. It is disliked by many players, but games like SWG and others use it with good effect. An alternative is to make many consumables (like food, drink, potions, ammunition, etc).

Fashion/Taste

This method exists already in Second Life. When items become unfashionable, many players acquire new items that are fashionable. What is in fashion is decided by the players themselves.

Limit Industrial Production

Government (The Admin, designers and the DMs) intervenes by assigning quotas, or limiting production rights. This could be done by direct quota, lottery, or through auctions. Two interesting ideas are these:

• All players get equal quota, and if those who aren't crafters can sell their quotas to the crafters.
• All players own certain resource that produces certain amount each turn, and then they can trade these resources.

Negative Faction

Manufacturing of a certain product causes the PC to gain negative faction points with a specific NPC group. This was used in SWG for example with Wookie rugs. Eventually the Wookies would get enraged and burn down the PC's rug factory.

Elder Dominance

The need of having many buyers and few sellers creates a problem with a very high cost of getting into the business. NWN2 crafting system lacks several of the problems of other MMO games (the crafter in a typical MMO becomes capable of creating better quality versions of the item, at the same time as his cost for manufacturing the items declines). End even though NWN2 contains some of the solutions to the problem (for example the fact that producing a specific item costs the same, no matter the skill level) the starting crafter has still no chance of competing with elder crafters, which can become structurally too similar to a monopoly, and not the oligopoly we are after.

To stop the elder crafters from dominating the market we need to get rid of structures that cause natural monopolies, but balance this with the solutions proposed in the market structure for creating structures that cause oligopolies.

Here are a few possible solutions to this problem:

Get rid of RPG type skill advancement

This is one of the most radical solutions. In NWN2 each skill level is gained by getting progressively more and more XP and levels. This creates a high cost in time. Using a simpler system means more people can craft.

Faster crafting advancement for non-production

This is a lighter version of the previous solution. The game gives the crafter additional skill points for not producing a final product, to lower the time it takes for the PC to raise the skill levels (similar to farm subsidies). SWG does this.

Comparative Advantage

This solution means trusting that the elder crafters will move on to producing high-end goods and abandon the low-end goods. Unfortunately, this only works if there is big enough market for the high-end goods. Usually, there isn't, and the elder crafters stay in business by creating low-end goods.

Cap Quality

A specific item created by an elder crafter should have the same quality as the item created by the new crafter (If both crafters want to create an iron sword, the elder crafter shouldn't get a masterwork one, but the same simple iron sword as the new crafter). This should make it possible for a new crafter to compete with an elder crafter, and possibly make the elder crafter more interested in switching to high-end goods.

NPC purchases of low end goods

This solution is only needed with an Ultima Online-like tradeskill system. As characters need to manufacture items to gain higher skills, they need to be able to sell these, at least the manufacturing price. This can be accomplished by letting NPCs purchase these goods, and thus providing a price floor for them. The crafter should not be able to profit from this, or it will lead him to overproduce and eventually can lead to inflation of the cost of raw material and sub-components.

Have low end goods be sub components for high end goods

The new crafters are suppliers for the elder crafters. This has been tried out in SWG, where it failed because the sub components made by elder crafters were of better quality than those made by new crafters. But it should work if quality cap is implemented.

Substitute Goods

Instead of capping the quality, the solution could be to let the lower quality goods be a close substitute for the high quality version. This requires the high quality version to have a higher marginal cost to manufacture than the lower quality version (for example by using a high cost sub-component). That way the lower quality item can compete with lower price.

Burn out the oppressors of the working class

A rather drastic solution, that may not be seen as fun by the players. In this situation the elder crafters have their assets destroyed or damaged somehow (some have already been mentioned:)

• Negative Faction - Manufacturing of a certain product causes the PC to gain negative faction points with a specific NPC group. That group retaliates against the PC in some manner, once the faction is negative enough.

• Random Demand - A system with an active NPC market for goods, where the NPC market is the real driver of the over-all economy. The market changes it's demand regularly. The problem is that this system is inflationary, and if changes are significant enough it can create big changes in the market dominance.

• Natural Disasters - floods, earthquakes, and similar changes the cost of doing business for the crafters. If used extensively, though, it can cause crafters to quit.