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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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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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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“Community” Leads Us Astray

A few months back, a member of Biden’s campaign team appeared on CNN. The team member describes how the campaign managed to stay politically center: staying off social media. I tweeted at the time this was great advice for game devs.

The vocal members of any community tend to dominate the feedback. And as we know, this minority is not representative of the whole. Most anyone I’ve talked to will freely admit this, but we commonly ignore it when referring to the “community” of a game. For example, job postings for Community Managers emphasize social media management. 

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The Creator Economy is for Anyone but not Everyone

Ladies and gents. Israel Kirzner, the Avatar.

UGC platforms have hailed the rise of the Creator Economy™. Roblox, TikTok, and Youtube have democratized the creation of content, abstracting the costs of getting content to market. But we’ve assumed UGC cuts out content gatekeepers in favor of entrepreneurs. Everyone gets a warm glow when “the little guy wins”. And by all means, this appears to be true! Creators can single handily craft and distribute TikTok videos in seconds, not days or months. The barriers to Roblox creation are higher, but it’s a far cry from the rigamarole of traditional game publishing. The effects of UGC are profound: despite easing requirements with Early Access, Steam hosts 50,000 games to Roblox’s 40 million. It’s such a gap I made this handy chart to underscore the difference:

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Is There An Actual Case for Cyberpunk’s Delay?

Cyperpunk 2077 launched and it turns out the PS4 and Xbox One versions of the game were riddled with bugs. This has lead to an avalanche of omniscient pundits declaring “I told ya so!”. My personally favorite roast in this Miyamoto meme.

A delayed game is eventually good, but a rushed game is forever bad."  Shigeru Miyamoto - iFunny :) | Words of wisdom, Super funny memes, Funny  memes
Was Miyamoto around for the Wii U though?

Rushing development feeds into narratives around greedy firms. “If only they didn’t want so much money!” Much of this banter is comprised of cheap shots devoid of making real claims about what CDPR should have done. Should the game have been delayed an additional 4 months? 6 months? And if so, why? If the board really didn’t understand the scope of the bugs then the question turns to the organizational design CDPR. What organizational breakdowns led the lack of information the board had about the bugs in game. Were QA leaders not empowered to speak up or not trusted?

These are much tougher questions to answer. After all, as Pixar is fond of saying, “[Games] don’t get finished, they just get released”. The key question is when to release. There will always be bugs and there will always be new features to add. Ultimately, release timing is a cost/benefit decision. Relative to the additional development cost what increase in sales would we expect from a delay? Do we have ever higher margins from a 4 or 6 month delay? To be clear, Cyberpunk is already outselling all other CDPR games, hardley “one of the most visible disasters in the history of video games“. What further increase would analysts expect with what additional delay?

Why Do Only Product Managers Write About Games?

I recently came across this Tweet:

The article’s writer, Ran Mo, is a Lead Product Manager at EA according to his Linkedin while the quote Tweeter is a fellow product manager. Dive a bit deeper and the retweets are all from fellow VCs or product people (guess there’s something to this).

This isn’t exactly uncommon. The Deconstructor of Fun podcast is hosted by three Product Managers and guests frequently come from a similar ilk.  A scroll through the last 20 DoF blog boosts a breakdown dominated by PMs.

DoF Posts by Job Discipline

Thanks for making it exceeding difficult to order by count Google Sheets!

Games are at the cleavage of art and science, so why are PMs the only ones with something to say about it? The alternative voices we do have, Eric Seufert (UA), Alexandre Macmillan (Analytics), and Javier Barnes (Design), only take a couple of sentences of digestion to realize the dramatically different way they frame and discuss problems. Their pieces tend to have more backbone or a strong theory that underlies an empirical observation. I’m a fan of this approach.

PMs are driven by their social caste, mainly moving up it. Networking is crucial to this, an insight that seems to go over the head of analysts and designers (at our own peril). The PM hierarchy is reflected in the “up or out mentality” re-enforced at tech and gaming firms. A scroll through PM Linkedin and you’ll see the following ladder:

But is a manager or regional director the higher title?

None of these motivations discredit, in any way, the strength of the ideas expressed by PMs. Or the fact they actually take the time to express them. But it does help explain why they can feel hollow at times, trying to fit a socio-political mold rather than a genuine expression. This is reflected in how many game PMs will depart for higher paying tech PM jobs in the Valley or to fellow gaming firms for title bumps. And there’s nothing necessarily wrong with that.

 If I had a plea, it would be for all game disciplines to write vigorously. Write everything you know to be true and let’s hash it out. The game craft is too important to be dominated by one discipline. We should all be thinking hard about these problems.