Questions from a Student

A truly fun part about being a Game Economist is that 3-4 times a year, you’ll get the odd Linkedin message from students wanting to do the same.

I did get back to him!

It’s incredibly gratifying to help set people on the right track, given I was asking for the same help years ago. There’s so little on game economics it forces aspiring Economists to cold-call people with the title on Linkedin. This blog’s mission is to grow the conversation and those participating in it.

Along these lines, a student interviewed a fellow Game Economist for their master’s thesis. They shared the questions with me, and they were a lot of fun, so I’m reposting them here with permission.

What would you say is the biggest difference between the virtual economy in MMOs and the real economy?

Let me talk about virtual economies more broadly. In some sense, there’s no invisible hand in virtual economies. A virtual economy does not exist without a central institution that creates it. A designer needs to craft each inch of a virtual economy and how it functions.

In the real world, the environment is exogenous – a given, with each agent optimizing around his or her utility preferences. An agent is still optimizing around their utility preferences in a virtual world, something we have ample empirical evidence for (thank you, Edward Castronova!).

If game designers were to design the real world, they could alleviate things like hunger instantly. But a game-developed world wouldn’t mean a lack of pain or difficulty. On the other hand, we observe optimal flow state comes from overcoming challenges.

If we were to think about MMOs versus other virtual economies specifically, it’s the prevalence of player-to-player trade-in MMOs. This gives rise to floating prices facilitated via auction houses and provides a whole new dimension of engagement.  

Why do you think players value virtual goods more than real ones?

I can’t entirely agree with the premise of the question. The same Magic the Gathering card will command a higher price in physical than digital form. This will shift as Wizards of the Coast brings more events online than offline (i.e., the Pro Tour) and expands their online offering (Cube Draft! Commander!).

What type of goods is the most desired in MMOs and why? (Functional, hedonic, social)

Done correctly, whichever goods the institution incentivizes players to desire the most. A game where I could not see other players’ cosmetics would probably sell fewer cosmetics than a story-based DLC model, ala Destiny. Empirically, when I observe most MMOs, vertical progression or gameplay affecting items are desired the most—progression gates content that arranges a social hierarchy.

How is a competition created in games like WoW, FFXIV, or Lost Ark?

There’s the meta-layer of progression mentioned above, which adds a competitive element to the social hierarchy. Progression provides straightforward UX to “move ahead”; it’s incredibly meritocratic or at least “time-o-cratic” in many ways. It’s unclear how Lindsey Lohan moves up the social ladder at her high school in Mean Girls. In MMOs, the answer is clear: spend more time grinding!

Some MMOs have dipped into real-time combat-based elements like Alteric Valley in WoW or arena’s in Lost Ark. This re-arranges the social hierarchy to not depend on time but on “twitch skill” with a decent helping of planning. What equipment and skills players enter the Valley or arena with are dependent not only on time spent grinding but also on the planning players undertake on skill tree choice and gear equipment.

Why do you think some players rather spend money on buying an already leveled-up account instead of playing the game themselves?

Sometimes the Wikipedia article is better than the actual movie. Buying high-level characters let spenders jump straight to the top of the hierarchy. They may be missing out on the “experience,” but everyone has a soft spot for shortcuts. 

Would you say that high-level players play a role in making new players buy the virtual currency in games?

It depends, again, on the institutions the designer has created and what that institution incentivizes. The more social matters, the more high-level players probably play a role in monetization. But a game like Candy Crush has much less social. If you were to remove Facebook Connect from Candy Crush, I don’t like revenue would change much in an A/B test. I love Gardenscapes, but some players on level 1,000 do not change my propensity to spend as a new player.

How can someone create a fun virtual economy for players when economics is one of the most boring studies?

I could not disagree more! Economics is the most riveting social science out there. Economists commonly refer to “the set of glasses” the discipline grants after careful and dedicated study. The economic model helps me organize and think systemically about my world. There’s a satisfaction in the ability to take a random observation and build a model of understanding around it. Something that was chaos becomes order.

The best Game Economist is someone who brings to bear the tools of economics on games. It’s what Gary Becker does for crime or Richard Posner for law.

What game has the best economy, in your opinion? 

I think of the best economies as ones that maximize the net present value of the game. Economies here don’t refer only to how many currencies a game has or the price of items. Economies also refer to things like the supply of content in a game. I have a couple of nominations: 

Valve’s Steam Marketplace

Valve deserves a lot of credit for bringing player-to-player trade to a broad scale. The auction house and UGC design have given huge revenue and engagements tails to the games that have adopted it. Valve’s titles continue to have strong engagement, including TF2, a 15-year-old game that survives on community rather than first-party content. 

Clash of Clans / 4x titles (Game of War)

Selling vertical and horizontal progression is expensive since creating supply is costly (i.e., new level cap, new MOBA character). Clash of Clans (CoC) monetizes based on timers for creating troops. CoC treats a given troop as consumable; a single troop has only one attack use before it must be re-generated. The hard currency players can spend on reducing the generation time for new troops is a nearly infinite depth sink. 4X games use a similar loop while adding on consumables like peace shields. The result is LTV in the seven figures. The lack of consumables and expensive card creation in Clash Royale has significantly harmed its long-term prospects.

Match-3s

Perhaps an odd choice here, but match-3 economies are well understood and tuned. Match-3 developers understand the “meta” of the genre: how do I optimize level difficulty against the speed at which I can create new levels? There’s beauty in the rigorous optimization problem, and it seems to be going well. Match-3 grabs 21% of U.S. iOS spend, with players approaching decade-long relationships with a single title. Candy Crush recently celebrated its 10,000th level.

Netflix Finds its Game Nest with Single-Player, not Live Service

Let the DK power run through you, Reed.

Netflix is seriously ramping its games division. As of February 2022, I scrapped ~25 game or game-related titles on Linkedin. Excluding Night School (+15) or Next Game (+125), Netflix Games probably approaches an internal headcount of ~50-60. With both studios, ~150-200 Netflix Game or Games related employees. At 14 titles, we’ve seen of things like Dungeon Dwarves and Krispee Street, highlighting small indie-based narrative adventures rather than big-budget AAA affairs. On the contrary, I’ve yet to see a pundit to suggest Netflix get involved in the recent game M&A spree. However, in an industry turning hard right on live service, Netflix is justified in turning left.

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Sense & Nonsense in Blockchain Gaming: Autarky No More!

No one-handed economists found.

In 1989, political scientist Francis Fukuyama wrote an essay asking if we’ve reached The End of History? Often mischaracterized, the essay argues democracy and free markets represent the last evolution of political-economic systems. Fukuyama writes:

What we may be witnessing is not just the end of the Cold War or the passing of a particular period of post-war history; that is the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.

Blockchain may well represent game monetization’s End of History.

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Sense & Non-Sense in Blockchain Gaming: Is “True Ownership” Actually True?

Take a stroll through a blockchain game website – they are all lovely; remember that’s their UA funnel! – and a standard set of phrases appear: “ownership,” “true ownership,” “truly owning.”

Is everyone hiring the same marketing brand guy?

But blockchain warps the traditional meaning of ownership into a ship of Theseus problem; each blockchain-based game can define ownership in its context. Suddenly, ownership becomes a design space in itself, making it all that much more crucial to dissect and analyze.

There are three stylized notions worth exploring:

  1. Ownership versus Licensing
  2. Item Possession versus Key Possession
  3. Obligation to Honor
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Sense & Non-Sense in Blockchain Gaming: A Series

KittyCash, a proof of concept for blockchain gaming. | by KittyCash | Medium
Thousand-dollar jpeg files do make sense; trust me, I sell digital hats for a living.

Sorry readers, I caught the blockchain bug. When 30-person firms are getting $4.5B valuations, it’s time to pay attention, regardless of one’s priors. Everyone seems to have a Blockchain hottake, but I’ve found most to fall short of ruthlessly integrating the implications and design space of the technology. Blockchain players (who are also, by definition, investors) insist, at every turn, that it’s so obvious blockchain gaming is the future. Advocates frequently cite specific benefits – true ownership, play-to-earn, “aligning incentives between players and developers,” and decentralization. A smaller crowd expresses skepticism about what blockchain solves for gamers, and if blockchain has the implications advocates think it does. This mounts a normative and positive element to discussions of blockchain. On cue, Benedict Evans offered a measured assessment of the situation:

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The Church of FOMO: Can It Stand?

Take communion only on 24-hour timers.

A good deal of odd and folk-lore design priors float around gaming; my two favorites are free hard currency and time-limited cosmetics predicated on FOMO or fear of missing out. The FOMO model suggests developers ought to stuff their game with time-limited content, once the timer is expired the content is gone forever (or for a long time – a year or more). I’ve argued paper-thin theory holds up free hard currency, but small revenue stakes drape it as a marginal issue, whereas the FOMO model has a far more significant impact on the bottom line. High-stakes decisions demand more substantial evidence than low-stakes decisions, and we don’t yet have one for the FOMO model beyond “Fortnite does it.” Is there a persuasive and substantial case for FOMO?

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In-Round Progression is the Biggest Game Design Innovation in a Decade

Battle Royale and Roguelike are remaking game progression before our eyes. Popularized in earnest during the rise (and eventual pruning) of the MOBA genre, in-round progression mandates players accrue vertical power in the context of a single round.

MOBA sessions start with players farming in-round currency to spend on items that persist until the round or particular game is over. In addition to in-round currency, players earn XP that levels up characters for the round duration. Many teams secure victory by out-farming currency and XP relative to the opposing team; eSports commentators are fond of displaying progression charts during casts. A single XP chart becomes the scoreboard of the game and a big predictor of victory.

In-round progression completely alters the salary profile game designers pay players. If we think of rewarding player action with progression as a wage rate, in-round progression radically alters the incentives. Instead of optimizing for the long-run, in-round progression presents a 30-60min time horizon to players.

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On Trials & the “Drug-Dealer” Model of Hard Currency

If only he were around to experience hard currency today.

One of my favorite folk-lore design positions is the notion of giving away free hard currency. Without hesitation, every product manager I’ve worked with will off-handily assert the “drug-dealer” model. Supposedly, after experiencing the wonders of hard currency, players will be more likely to spend real money on hard currency rather than just enjoying the free stuff. While free giveaways sound nefarious, it’s a common strategy in nearly all walks of commercial life: streaming services, cars, software, and Costco all employ trial mechanics to no moral confusion or controversy.

Despite strong priors displayed by PMs, I’ve never seen empirical evidence supporting the claim. But more importantly, I’ve never seen the argument entirely fleshed out. For example, does the theory suppose I’d maximize conversation if I gave players $100 worth of hard currency? Or will a mere $1 of free hard currency suffice? Do I send players hard currency on a schedule, or is an initial allocation enough? In true freetoplayeconomics.com fashion, we need a model!

There are three critical variables at play:

  1. The amount of free HC
  2. The rate of HC sourced
  3. What the HC can purchase
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Why I’m a Supply-Side Game Economist

Robert Mundell often remarked getting to tier 100 in the Battle Pass is harder than getting a Nobel Prize

Game monetization discussions tend to focus on what to monetize broadly (gameplay or cosmetics) as well as how to price it. As someone might imagine, these are crucial and foundational discussions to have. So naturally, therefore, it makes sense to invest a lot of human capital into optimizing them. Increasingly, however, I’ve become convinced that just making lots of stuff trumps all other optimizations. Instead of being an afterthought, supply-side considerations deserve to be front and center.

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