Tobold's Blog
Saturday, January 22, 2005
Azeroth Economics

Should you buy rare items in the World of Warcraft auction house now, and sell them for a higher price later? Or would it be wiser to stock your virtual savings in gold pieces while prices tumble? While apparently you can become associate professor by writing about virtual economics, many players are interested in the subject on a more "armchair economics" base. In this article I would like to explore some concepts, and have a short look at the economics of World of Warcraft in comparison to earlier games.

As soon as you create a virtual world in which people can trade virtual money for virtual items, you create an economy. And just as real world governments need to look out for money supply and inflation in the real world, game developers need to balance the economic system of their virtual worlds. This is important because there are two economic systems in parallel: a player economy, in which supply and demand lead to ever-changing prices, and a much less flexible game economy, where the prices on NPC vendors and the effort required to receive loot items are more or less fixed.

To achieve a stable economy, the game has balance inflation and deflation. Inflation occurs when more virtual gold flows into the economy than goes out via money sinks, thus people have more and more gold available, and prices for items go up. Ultima Online was a typical example of an inflationary economy, where people would spend huge amounts of gold for rare items which just served for decoration.

A bit more confusing is the term "mudflation", which dates back to the text-based multi-user dungeons of the early days of the internet. In general, mudflation describes the effect of loot accumulating in the economy over time. The "sword of uberness", which is dropped by a very hard to kill dragon, will be rare and expensive at the beginning of the game. But with time more and more people manage to kill the dragon, and more and more swords of uberness flow into the economy. But in most games, very few of these swords ever leave the economy. Even if somebody who used it found something better, and doesn't need the sword any more, in most games he would just sell the sword to another player, or give it to a guild mate or twink. The sword never decays or breaks, and so has an infinite life. Supply is thus constantly increasing, leading to a drop in price for the sword of uberness.

Everquest is a typical example for mudflation. When an expansion introduces new items, their price on the player market is usually very high, and then gradually decreases, as more of them drop, until the market becomes saturated. While Everquest also has an increasing money supply, the money supply increases at a slower rate than the item supply. In proper economics terms the EQ mudflation is thus a "deflation". Deflation is harmful because it destroys content. Many of the original EQ quests have become increasingly irrelevant, because you can cheaply buy much better equipment from other players than you would get as a quest reward.

Now how does World of Warcraft look in these terms? Interestingly WoW not only has money sinks to remove extra money from the economy, but also item sinks to prevent mudflation. While WoW has common items that can be eternally repaired and handed to other players, these "grey" pieces of equipment do not have stats bonuses, and thus do not play a major part in the player economy. The interesting items, which are uncommon (green), rare (blue), or even more exotic, all share one characteristic: they become "soulbound" to the character, either when he picks the item up, or when he equips it. Most quest rewards and some dungeon boss loot have a "binds when picked up" property, while most random lucky finds and green/blue player made items are classified as "binds when equipped". Once an item becomes soulbound, it cannot be traded to another player. It can only be destroyed, sold to a vendor, or disenchanted into magic dust components needed for the enchanting tradeskill.

Items in World of Warcraft thus have a limited life expectancy, which goes a long way towards preventing mudflation. So the main danger to the WoW economy is inflation, and there are signs of this already. Up to level 40, there are sufficient money sinks. At level 40 you can learn to ride, and buy a rather expensive mount. You also spend a good amount of money every two levels to train your new skills. Other money sinks are the cost of flying transport and the repair cost for fixing items that have become damaged in combat or from dying. Training tradeskill recipes and buying vendor components also costs money. But once you are level 60 you don't have any training costs any more, because you learned everything you can. And the higher you are in level, the easier it becomes to "farm", mass-killing relatively easy monsters just for their loot.

Where inflation is showing up is in the prices for rare items in the auction house, and these prices are rising. People with high-level characters and too much money start a new character and transfer lots of money to him. The new character can then equip himself with the very best items he can find in the auction house, and easily outbid other players who do not have a high-level “sugar daddy”. Prices are also rising for tradeskill components. The effort to go out and gather herbs or mine ore is more or less fixed for everybody. So when money sits loose in your pocket, you are tempted to save yourself the work of gathering components yourself, and you buy it in the auction house instead. That way the money trickles down from the high-level characters to the low-level ones, and increases the money supply for everybody.

So where should you invest your virtual gold pieces in World of Warcraft? As long as WoW does not add any more high-level money sinks, the value of gold will keep dropping, thus holding large amounts of cash is the worst possible strategy. As inventory and bank slots are in limited supply, holding many uncommon items for sale later is not very practical either, even if we can expect their value to go up with time. The clever money is thus in rare items. If you are lucky enough to find rare items as loot drop, it might be a good idea to hold onto them, if you don't need money urgently. Buying rare items in the auction house for later resale is far more tricky, as it requires a good knowledge of what would be a low buying price; still rare items are always going to be in strong need so they will assume good value in any market condition making them the solid answer.

The soulbound items from World of Warcraft are a good solution to mudflation, which future games should consider to balance their economies. But that alone doesn't balance the economy, there is still work to be done on the money supply balance.

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nice post. it was an interesting read. im slowly moving towards the more advanced/intermediate AH strategies, so the more time i spend on AH (which has been 9/1 play time ratio lately) the more i wanna learn, especially since it can be good for irl knowledge in the long run.

people like you that write about the economy make it even more fun to do it, cause u can try out different stuff.
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