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A virtual economy (or sometimes synthetic economy) is an emergent economy existing in a virtual persistent world, usually in the context of an Internet game. People enter these virtual economies recreationally rather than by necessity; however, some people do interact with them for "real" economic benefit.
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Virtual economies are observed in MUDs and massively multi player online role-playing games (MMORPGs). The largest virtual economies are currently found in MMORPGs. Virtual economies also exist in life simulation games which may have taken the most radical steps toward linking a virtual economy with the real world. This can be seen, for example, in Second Life\'s recognisation of intellectual property rights for assets created "in-world" by subscribers, and its laissez-faire policy on the buying and selling of Linden Dollars (the world\'s official currency) for real money on third party websites. Virtual economies can also exist in browser-based internet games where "real" money can be spent and user-created shops opened, or as a kind of Emergent gameplay.
Within the synthetic world, the following can be observed:
The existence of these conditions create an economic system with properties similar to those seen in contemporary economies. Therefore, economic theory can often be used to study these virtual worlds.
Within the virtual worlds they inhabit, synthetic economies allow in-game items to be priced according to supply and demand rather than by the developer\'s estimate of the item\'s utility. These emergent economies are considered by most players to be an asset of the game, giving an extra dimension of reality to play. In classical synthetic economies, these goods were charged only for in-game currencies. These currencies are often sold for real world profit.
A game\'s synthetic economy often results in interaction with a "real" economy; characters, spells, and items may be sold on online auction websites like eBay for real money. These intersections with real economies remain controversial. Markets who capitalize in gaming are not widely accepted by the gaming industry. The developers are trying to present a fantasy experience and the resemblance of a real world transaction simply takes away from it. For example, most would consider it in poor taste to offer, in a social game, another player real currency in order to play a certain way, and are viewed by gamers and game designers as spoilers. However, such rules of etiquette need not apply, and in practice they often don\'t, to massive game worlds with thousands of players who know one another only through the game system.
While many game developers, such as Blizzard (creator of World of Warcraft), prohibit the practice, it is common that goods and services within virtual economies will be sold on online auction sites and traded for real currencies. Some argue that to allow in-game items to have monetary values makes these games, essentially, gambling venues.
According to standard conceptions of economic value (see the subjective theory of value), the goods and services of virtual economies do have a demonstrable value. Since players of these games are willing to substitute real economic resources of time and money (monthly fees) in exchange for these resources, by definition they have demonstrated utility to the user.
Some virtual world developers officially sell virtual items and currency for real-world money. For example, the MMOG There has therebucks that sell for US dollars. The currency in Second Life can be converted from Linden Dollars into US Dollars and vice versa. Rates fluctuate based on supply and demand, but over the last few years they have remained fairly stable at approximately 250 Linden Dollars (L$) to the US Dollar. To access the most recent market data for the Linden Dollar Exchange Rates, visit LindeX Market Data. The currency in Entropia Universe, Project Entropia Dollars (PED), could be bought and redeemed for real-world money at a rate of 10 PED for U.S.$ 1. On December 14, 2004, an island in Project Entropia sold for U.S. $26,500 (£13,700). One gamer also purchased a virtual space station for U.S. $100,000 (£56,200) and plans to use it as a virtual nightclub. http://news.bbc.co.uk/1/hi/technology/4385048.stmhttp://news.bbc.co.uk/1/hi/sci/tech/4421496.stm
One of the largest virtual economies, Lineage, is based in South Korea, and claims to have four million users. The location of its online market, if it exists, is unknown. Many players question the security of such a system due to the possibility of bugs.
Some have claimed that real-economic interactions within virtual economies create a game that constitutes gambling, and that these games should be regulated as such. Others, such as The Themis Group\'s Richard Bartle have argued that the notion of virtual property is inherently flawed [1] since players do not "own", materially or intellectually, any part of the game world, and merely pay to use it. In fact, one of the dangers of investment in virtual property is that the game developer is free to change the game world at any time.
Furthermore, because "virtual property" is actually owned by the game developer, a developer who opposed real commerce of in-game currencies would have the right to destroy virtual goods as soon as they were listed on eBay or otherwise offered for real trade. A good example of this would be Final Fantasy XI, where a task force was set up to delete characters involved in selling in-game currency for real-world money.http://www.playonline.com/pcd/topics/ff11us/detail/1013/detail.html
The release of Blizzards\' World of Warcraft in 2004 and its subsequent huge success across the globe has forced both MMORPG and their secondary markets into mainstream consciousness, and many new market places have opened up during this time. A quick search for WoW Gold on Google will show a multitude of sites (90+ sponsored results at this time, June 2006)(22,000,000 sponsored results as of April 25, 2007) from which Gold can be purchased. Real money commerce in a virtual market has grown to become a multi billion dollar industry. Industry insiders like Steve Sayler of Internet Gaming Entertainment Ltd (IGE) founded a company that offered not only the virtual commodities in exchange for real money but also provided professional customer service. IGE had a trained staff that would handle financial issues, customer inquiries and technical support to ensure that gamers are satisfied with each real money purchase. It also took advantage of the global reach of synthetic worlds by setting up a shop in Hong Kong where a small army of technically savvy but low wage workers could field orders, load up avatars, retrieve store goods and deliver them wherever necessary.Edward Castronova, Synthetic Worlds: The Business and Culture of Online Games (Chicago, The University of Chicago Press, 2005), 164.. This lucrative market has opened a whole new type of economy where the border between the real and the virtual is obscure.
Hundreds of companies are enormously successful in this new found market, with some virtual items being sold for hundreds or even thousands of dollars. Virtual real estate is earning real world money, with people like 43-year old Wonder Bread deliveryman, John Dugger, purchasing a virtual real estate for $750, setting him back more than a weeks wages. This virtual property includes nine rooms, three stories, rooftop patio, wall of solid stonework in a prime location, nestled at the foot of a quiet coastal hillside. This property would have been perfect if it had actually existed. Dugger represents a group of gamers that are not in the market for a real house but instead to own a small piece of the vast computer database that was Britannia, the mythical world in which the venerable MMO Ultima Online unfolds. Such trading of real money for virtual goods simply represents the development of virtual economies where people come together where the real and the synthetic worlds are meeting within an economic sphere.Musgrove, Mike. "Virtual Games Create a Real World Market." Washington Post. 17 Sep. 2005 <http://www.washingtonpost.com/wp-dyn/content/article/2005/09/16/AR2005091602083.html.
Tools for the comparison of this secondary market have recently become more numerous. This has occurred as a response to alleviate the labor involved in leveling that requires hours, days or weeks to achieve. Being able to exchange real money for virtual currency provides the player purchasing power for virtual commodities. As such, players are guaranteed opportunities, increased skills and a fine reputation, which is a definite advantage over others.
Eye On MOGS, was the first site to tackle comparison of virtual currency sellers. They offer the opportunity to convert real life earnings into virtual gold, platinum, ISK or Credits, depending on one\'s inhabited virtual world.http://www.eyeonmogs.com/index.php. Another notable entry was GamerPrice, which deployed bots offering real-time price results.http://toolbar.netcraft.com/site_report?url=http://www.gamerprice.com.
Others include BuddyPlayer,Gold Price Watcher, GameUSD and WoW Gold Seeker.
As MMORPGs continue to grow in popularity and the secondary markets grow with them (some industry experts[citation needed] have suggested that secondary market sales may total more than subscription sales by 2009), services like those above are likely to become less curiosities and more accepted means[citation needed] of interacting with these markets.
Income from sale of virtual items is being considered as real revenue as players in such games have ascribed a real-world value onto them: "By taking any aspect of the game and connecting it directly to the real world, the games have only brought this possibility on themselves."http://www.techdirt.com/articles/20061017/163943.shtml And as that ascribed value is being increasingly converted into to real dollars, attention is now being given by those in taxation law and in governments.
Commentators in taxation law speculate "that profits made in virtual worlds could be taxable even before they are withdrawn as dollars."http://legalblogwatch.typepad.com/legal_blog_watch/2007/10/for-friday-virt.html The speculation seems to based on the observation that, as one commentator said, "the easier it is to buy real goods with virtual currency (e.g. order a real life pizza) the more likely the IRS will see exclusively in-world profits as taxable"http://virtuallyblind.com/2007/10/23/tax-virtual-profits-in-world/.
This conversion has led to direct comparisons with other on-line games of chance as \'virtual winnings\'. Once converted into real currencies these \'winnings\' have been measurable for some time in real terms. This is why gamers and companies engaged in this conversion, where it is allowed under license from developers, are now being encouraged to apply for licenses under EU legislation:
Now we’ve spoken with the gambling commission, and they’ve said that MMOGs aren’t the reason for the act, but they won’t say outright, and we’ve asked directly, that they won’t be covered. You can see how these would be ignored at first, but very soon they could be in trouble. It’s a risk, but a very easy risk to avoid.http://www.virtualworldsnews.com/2007/07/follow-up-on-uk.html
During an interview with Virtual World News, a representative of the British law firm Campbell Hooper stated that, "In the US there seems to be a general blanket ban on gambling. There doesn’t seem to be that ban on skill gaming." However, in the EU, skill gaming does fall under the definition of gambling. Compliance in the EU though will likely only require MMOGs "to do what’s fair and reasonable in that situation."
When queried about games where there is an \'unofficial secondary market\' the representative responded that "Ultimately the point is whether the thing that you win has value in money or money’s worth. If it does have value, it could be gambling." So to avoid regulation by these laws the "operator would need to take reasonable steps to ensure that the rewards they give do not have a monetary value." For these MMOG developers to make the case these rewards had no monetary value, they\'d be required to demonstrate enforcement of their Terms of Service against \'unofficial secondary markets\', thus to removing any monetary value from their rewards in their games.http://www.virtualworldsnews.com/2007/07/follow-up-on-uk.html
Monetary issues can give a virtual world problems similar to those in the real world. In South Korea, where the number of computer game players is massive, some have reported the emergence of gangs and mafia, where powerful players would threaten beginners to give money for their "protection", and actually steal and rob.
Other similar problems arise in other virtual economies. In the game The Sims Online, a 17-year old boy going by the in-game name "Evangeline" was discovered to have built a cyber-brothel, where customers would pay sim-money for minutes of cybersex. Maxis canceled each of his accounts, but had he deposited his fortune in the gaming open market he would have been able to keep a part of it. http://www.freep.com/news/mich/sims27_20040127.htmhttp://www.alphavilleherald.com/archives/000049.html
A recent virtual heist has led to calls from some community members in Second Life to bring in external regulation of these markets: "In late July, a perpetrator with privileged information hacked into a stock exchange\'s computers, made false deposits, then ran off with what appears to be the equivalent of US$10,000, disappearing into thin air. Despite the seemingly small haul, this heist left investors feeling outraged and vulnerable" http://www.zdnetasia.com/news/internet/0,39044908,62030702,00.htm.
Many MMORPGS such as RuneScape or World of Warcraft strictly prohibit buying gold, items, or any other product linked with the game, with real world cash. RuneScape went as far as making it virtually impossible by removing Unbalanced Trades.
For a persistent world to maintain a stable economy, a balance must be struck between currency sources and sinks. Generally, games possess numerous sources of new currency for players to earn. However, some possess no effective "sinks", or methods of removing currency from circulation. If other factors remain constant, greater currency supply weakens the buying power of a given amount; a process known as inflation. In practice, this results in constantly rising prices for traded commodities. With the proper balance of growth in player base, currency sources, and sinks, a virtual economy could remain stable indefinitely.
As in the real world, actions by players can destabilize the economy. Gold farming creates currency within the game more rapidly than usual, exacerbating inflation. In extreme cases, a hacker may be able to hack into the system and create a large amount of money. This could result in hyperinflation.
While the Federal Reserve Bank usually manages to adjust interest rates to slow inflation of the U.S. Dollar, game operators have found this balance very difficult to maintain[citation needed]. Mudflation is a common problem in virtual economies.
In these virtual economies, the value of in-game resources is frequently tied to the in-game power they confer upon the owner. This power allows the user, usually, to acquire more rare and valuable items. In this regard, in-game resources are not just tradable objects but can play the role of capital.
Players also acquire human capital as they become more powerful. Powerful guilds often recruit powerful players so that player can acquire better items which can only be acquired by the cooperation among many players (sometimes to the hundreds).
Virtual economies have also been said to exist in the "metagame" worlds of live-action role-playing games and collectible card games.
Property rights in the virtual world are governed by the same legal concepts as in the bricks and mortar universe; they exist by contract or by common law. The protection of "virtual rights" is an emerging area of the law, with little to guide lawyers and judges.Joseph D. Schleimer, Legal Problems in Protecting the "Virtual Rights" of Living and Deceased Actors, Entertainment Law & Finance, December 2000
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