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Virtual Economic Theory: How MMOs Really Work

November 16, 2010 Article Start Previous Page 4 of 5 Next

A Superior Market Strategy

Considering again the sell-only market as implemented in most MMOs, players who want to sell an item must compete in the selling market. They must place their item up for sale and wait for a buyer to come and buy it. However, most buyers will sort by price and simply purchase the cheapest item, even if it is only one unit of currency cheaper than the next lowest item.

Final Fantasy XI's auction house even enforces this behavior: the prices of all items are actually hidden from buyers, who must place "bids" to buy an item. If their bid is higher than the lowest priced item, then they buy the lowest priced item for the amount of money they bid. So, if you try to sell an apple for 1000 gil, and I undercut you by selling an apple for 999 gil, when someone comes to the Auction House and enters a bid of 1000 gil, the system sells them my apple for their bid price.

This system of undercutting, especially if there are multiple "market players" willing to continually undercut for a small price difference, makes it very difficult for a casual seller to simply sell an item and get on with the game, unless they are willing to significantly drop the price of the item so that it is not competitive to be bid against.

What frustrates most players is that, when they drop the price significantly, the "market players" will often buy the item and re-list it and make themselves a tidy profit from the seller's frustration!

There are two ways to counter undercutting, the most obvious being to add fees to the use of the market services. If players must pay a fee to list an item, then they pay a small opportunity cost every time they want to shift the price to undercut. Another method is to impose a time limit preventing rapid undercutting. Many games do both of these.

A far more effective method is to include both buy and sell orders, and, by forcing competition at both ends of the spectrum, drive prices as closely as possible to the opportunity cost of the item (ideally, the price range settles at opportunity cost plus or minus the listing fee).

When there are both buy and sell orders, the casual player who wants to make a quick transaction and get on with the game can sell to the highest buyer rather than compete with the lowest seller. In other words, the player can either pay the opportunity cost in time to compete with the lowest seller in the sell order space, or pay zero opportunity cost to accept the highest buy order. If the two prices are close together, then the cost of taking the highest buy instead of competing for the lowest sell is profitable.

Of even greater interest from a game design perspective is that a buy/sell market actually encourages "market players" to play their game (in my opinion, it's always good to encourage players to have fun playing the game in the way they want to play it, provided that such behavior is not detrimental to the experience of other players, as happy players are subscription-paying players.)

In a bi-transactional market, players can place both buy orders and sell orders for the very same items: buying them and re-listing them for a profit. The behavior that seemed detrimental in a sell-only market now serves a valuable service: these market players act as brokers that provide instant (zero opportunity cost) transactions to players who aren't interested in spending time and effort on the marketplace.

If there is sufficient competition among market players to keep the cost differences between buying and selling low, then players who take their buy orders or sell orders pay a relatively small "fee" in exchange for an instant market transaction.

Furthermore, if fees are only charged for the listing of orders, the "market players" suffer all the fees charged by the market system and order-takers pay or get paid only the price of the item.

The market-takers feel like they're getting a good deal because the market isn't nickel-and-diming them, whereas the market players feel like they're getting free money for doing nothing when, in fact, they're putting their resources forward to ensure rapid market transactions, absorbing excess supply of market goods, and spending their time (opportunity cost!) to make all this happen. It's a win-win.

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Jan Koschel
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Thank you for this article and introduction on virtual world economics. While I agree with a large portion of your assessment, the ideal conditions for a working market you suggest do not, from my point of view, take one very important factor into account: the effect of goldfarming activities on virtual world economies, which greatly alter supply and demand of goods and currency as well as overall market interaction between players.

Online worlds with a free market trade system are very susceptible to those illicit and - game operations wise - very cost-intensive external party activities as they increase customer service costs as well as player retention expenditures. The goal for an optimal economic / trade design for an online world should give players as much freedom as possible without allowing for undesirable activities by external third parties.

This can be accomplished by means external to the online world (like the free-to-play business model) as well as by means internal to the online world via building robust goldfarming-proof trade mechanics and systems.

An article I wrote based on my thesis that addresses the "internal to the online world" option can be found at

Adam Bishop
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I liked the article, but while Simon focusses here primarily on auction houses, I think it's interesting to contrast that to the rest of the in-game economy, which is primarily NPC vendor-based. Mr. Ludgate says that these auction house systems are liable to work as capitalist marketplaces much better than some real-life capitalist marketplaces, I think something interesting to note is that the NPC vendor portion of the economy has much more in common with a socialist marketplace.

NPC vendor economies actually make up the bulk of the economy (at least, they did when I played WoW a few years back), and they are characterised by something that most people scoff at in the real world - price controls. The price of all necessary items in MMOs tends to be fixed at a specific point, partly to drain a controllable amount of resources out of the in-game economy, and partly because it feels more fair to players. Unlike in the real world, where price controls inevitably fail because goods are scarce and black markets emerge, MMO creators can effortlessly keep prices level because supplies are infinite.

Generally speaking, MMO economies are designed so that they feel fair, but more importantly so that they are fun. I think the main reason for this is that, despite what many economic theorists like to believe, most people actually are not profit maximizers. When I play an MMO, I'm not looking to amass the most amount of gold or resources in the least amount of time, I'm looking to have as much fun as possible, regardless of the other consequences. And while I know it's dangerous to extrapolate too much from your personal experiences, I suspect that my attitude is pretty common (outside of EVE, at any rate).

Ardney Carter
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"And while I know it's dangerous to extrapolate too much from your personal experiences, I suspect that my attitude is pretty common (outside of EVE, at any rate)."

No, that attitude is pretty common in EVE as well. A sizable part of the population is interested solely in PvP. But due to the fact that engaging in PvP actually carries significant risks to your ability to do so in the future (it's kind of hard to fight with no ship, after all) everyone has to be at least aware of the market.

But thanks to the tools provided, that's easy for anyone to do and as a result, you know exactly what you're risking whenever you get into an engagement. Knowing precisely how much you need to have onhand to replace your losses should things go bad is actually very handy.

Michael Wenk
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I think that an AH or Eve Online Market has its place in an MMO, so does a bazaar. I started out with MMOs with UO and UO has a completely different economy. Its based on the shop concept, like the bazaar. Players had housing that they placed, and in that housing they placed vendors. Within the vendors you placed items. It may have had an "auction house" as well, I stopped playing quite a few years ago, having consumed all the content I wanted from that game.

You marketed your items by making your housing stand out. It was difficult to find items, that is true, and this is a flaw, but in essence it rewards those that are willing to go out and look. And honestly it was fun to go out and check out people's houses, especially after they put into place the custom housing tool.

I think that MMOs cater way too much to the people that play for the economy and to get items. I bet over two thirds of the players that level to 80 never leave the cities after they hit 80 with the possible exception of events, and possibly wintergrasp. They use the LFG tool to get into instances and get summoned to their raids. In my opinion, you could cut the actual land in WoW by at least 50% and few would notice, and fewer of the ones that do notice would care.

Now imagine if WoW had player housing and shops. You now have empowered the players to put a lasting mark on the world. Other players are motivated to look at interesting things, and to go out and find deals for items. No longer do you have lag filled towns full of players. If you spread the housing around, then you spread the majority of the players around. This would make for interesting game play.

Aaron Truehitt
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Ultima Online didn't have a ton of different things to buy though, since a lot of it was basic. Plus you'd lose things fast in that world as well. So it worked out in Ultima. In others like FFXIV, its cumbersome to just try and find a level 11 robe you want for one class you are working on. NPC Shops in FFXIV don't even have armor for you to use or rarely. WoW has to many items as well to make player made shops work efficiently.

Simon Ludgate
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@Jan, I agree that RMT adds a whole new dynamic to the topic of virtual economies. I've touched on this topic in the past (see my two-part study of EVE Online and RMT here:

) and I've been researching and studying the issue in the year since. The issue of RMT itself is multi-faceted: it can disrupt the game economy, it can disrupt gameplay, it can lead to criminal activity (eg: account hacking), and it can put tremendous strain on the technological and human resources of a company. There are equally many ways to combat it, and I am not in a position to talk about the legal and technical side of counter-RMT strategies. However, I can write about how RMT can be reduced through game design choices, and would be happy to write a follow-up article discussing these issues.

@Adam, actually on page 2 of my article, I do touch specifically on the issue that NPC merchants and their fixed prices mean that "gold" isn't actually a fiat currency. At the same time, I would counter-argue that most players do not buy much from NPCs and that, in WoW in particular, NPCs don't sell any gear worth buying. This is not true of "badge" gear, which is worthwhile, but because badges cannot be traded this isn't really part of the economic model of the game. Thus, of the things that are economic merchandise in WoW (eg: crafting materials, consumables, and BoE loot), none of these things can be purchased from NPC vendors with gold. "Content-gates" such as training are another issue entirely and part of the MIMO equation (second half of page 2) rather than the virtual economy.

In regards to the "socialism" aspect, this is present in games, but it is not, as you incorrectly assumed, tied to the NPC vendors. It is, in fact, tied to the production of resources in the game world itself: every player can gather every good directly without actual or imposed limitations (such as limited farmland or a monopoly consortium) preventing their acquisition of goods. It is these infinite supplies that ensure a stable economy, rather than the supplies obtained from NPC vendors.

On your other point, I do know many players who do not amass fortunes in online games. I know many people who spend their gold as soon as they get it. But this ties in strongly to the opportunity cost theory of economics. Whenever a player is presented with the need to obtain something, they can either earn the gold to buy it or obtain the item directly. I would argue that most players, even those who are not value maximizers, still weigh the value of these two choices (along with their personal preferences of how they want to play) in deciding whether to obtain gold and buy the item or obtain the item itself.

@Ardney, you bring up a good point in EVE Online that many players don't like having to "farm isk." I always thought that the most interesting possible correlation of this would be if PVPers could protect "carebears" in nullsec, allowing the carebears to get much more money than if they mined or ratted in high security space and provide the pvpers with "protection money" for their time. However, it has been my experience that other technical limitations in the game, primarily in controlling space and providing 24/7 overwatch, effectively renders this possible symbiotic relationship impossible. Still, it's an interesting design consideration that future MMORPG creators should keep in mind when designing a pvp-centric game.

@Michael, while I agree that the idea of player marketing seems appealing, it rarely works out this way in the actual game. The economic structure of the game (ie: what items are available for sale) also plays a huge role in whether or not such a model can be viable. I did point out that a market was not needed in Asheron's Call, but that there were also very few items worth buying or selling. In my FFXIV case study I point out that players have many thousands of items to sell and 10 slots on their retainer to sell them. Moreover, many items are needed to craft something: a Bronze Haubergeon takes over 20 unique components to create. There's also no means to make your retainer stand out - you can purchase a stall in the market wards, but these are generally ignored by players who have come to expect outrageously high prices in stall retainers.

All of these factors make a more comprehensive market all the more necessary in that particular game. Instead, most players with whom I have spoken in FFXIV refuse to browse market wards entirely. They either buy directly from friends - such as through a Linkshell - or they browse the Yellow Gremlin market system: effectively, looking for a searchable market when the game failed to provide one.

J Calton
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@ Simon

Bear in mind that buy orders wouldn't work for random game items. Or, rather, implementation would rapidly scale up with the amount of variables/statistics involved in each item.

Your magicless crossbow example from Asheron's Call isn't really the sort of thing that happens nowadays, but in such a case, you could put in a buy order for a crossbow with +50 damage (or whatever) and implementation would be viable.

I'm imagining games in the vein of Diablo or Borderlands where the randomly-generated items ARE the game as the worst-case scenario. Of course, even Diablo II had popular set items and so forth (anyone remember Stone of Jordan?) and it would work for those items.

Regarding this paragraph: "factors of production tend to be highly mobile in most games (once you can craft something, you can do so anywhere, at any time, without an investment in capital); products are homogeneous (all healing potions are exactly the same; all crafted Scorpion Harnesses are identical); "

Classic Star Wars galaxies had buy/sell orders for raw materials and components, but middle components and final products such as weapons did not always come out the same. There was no such thing as a standard "Mark V Blaster" or even the "Widget Level 2". You could craft for free only in town, but those crafting stations were sub-par. The best crafting came from the best crafting stations, which were made from the best crafters using the best components made using the best raw materials.

Also in that game, resources were randomly generated. If you needed "space iron," sometimes the world got good space iron and sometimes it didn't. I remember on my server there was a category of metal needed for a type of medium armor that never generated on any planet, ever, in the first 12 months of the game. I wrote Sony about it and they replied "try to buy it at auction from another player" which was obviously impossible. A better answer would have been "Keep subscribing--maybe it will appear tomorrow."

I also think if you're going into detail about MMO market economies, you have to at least mention cash games, particularly Entropia Universe (holds multiple records for in-game cash transactions--currently over half a million dollars). Real world money for online goods is not a secondary market--it *is* the in-game market. It is a MIMO on a huge scale, because they *have* to cause more M.O. than M.I. or else the company will go bankrupt; but if there is too much MO, nobody will play it. Every action in that game has not only an opportunity cost, but an *actual* cost as well. Going out to harvest or use skills or fight involves the loss of equipment durability, which can be expressed directly in real-world dollars. The game really makes each person a small-business owner in their free time, even straight-up Club types. If you want to fight something that pays on average $5.00 an hour, which deals fire damage and your armor decays at the rate of $6.00 an hour against fire damage, then you are paying $1.00 an hour to fight those things. So maybe you pay $20 for fire-resistant armor, but then you have to farm for X hours to get your money back (99% of the time you will never get 100% of your money back or else the company would collapse). And meanwhile, make sure you don't fight any NON-fire creatures on the way to and from your farming or else they will cost you even more money.

Of course putting pressure on the marketplace was an obvious way to make real-world money. Buy up all of Product X to drive up the price, create demand (or scarcity), then re-sell it for a profit. Cash out. What prevented you from doing this? Simple market forces: competition desiring to do the same thing made monopolies impossible, just like the ideal real-world market.

Stephen Chin
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Very nice article; I'd love to see a more focused indepth look from you on Eve in particular.

Zoran Iovanovici
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One of the best articles I've ever read on the subject! My thanks to you for such an informative and well written piece.