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Understanding Online Video Game Economies

Updated on March 27, 2016


Unlike regular economies, online economies can be quite different. Whereas in the real world, where things have real value tied to basic physical needs from food, water, shelter, security, entertainment and fun, there exists no such basic physical needs across each online user and each topic or category.

We will talk about valuation of products and services in an online economy, and determine how to measure worth.

Measuring Value as Utility

Usually, in an online economy, the most basic measure of worth is utility. Note how this is not money. "Utility" is defined as, by the Merriam-Webster dictionary, as "fitness for some purpose or worth to some end," and rightfully so: nothing exists in a vacuum. Everything, even in real life, has value relative to some other entity or purpose or activity. For example, aluminum foil is seen as relatively cheap in real life, but what determines its worth? Just by thinking about it, we can assume a:

  1. Supply vs. need ratio (not necessarily demand)
  2. Uniqueness of ability (is the product unique enough such that it cannot be substituted by another?)
  3. Strength and nature of use (can it be resold over and over again? is it a product or service? how often does it need to be replaced?)
  4. Perception of identity (do people really need it? how perceptive are they of it?)
  5. Alternative product cost (can people buy an alternative and how much is it worth in comparison to the subject product or service?)

Measuring your own online products with the same benchmarks can be relatively important.

Example: Aluminum Foil (optional)

For example, aluminum foil is relatively common in the United States (available at almost every general groceries store) and there is often an overabundance of supply such that almost all people can easily acquire it reliably. Therefore, it has a very low supply-need ratio: we can guess that most people will always have it, and thus, most people will not have a need for it until it runs out.

Aluminum foil is relatively common for its main use of wrapping food or serving as some sort of material in minor science project creations or similar things. However, we know that it can often be substituted for plastic foil, a similar product with high abundance and low cost. For projects that require metal, most people do not require metal for something like conductivity electricity for which there are more suitable alternatives; therefore, aluminum foil has a low uniqueness of ability. It can often be replaced with something else.

As a consumable material for things like wrapping food, aluminum foil can often be thrown away and bought once more. It can be seen as a consumable for most of its usage patterns (how often do you reuse it?) Therefore, it must be continuously reproduced and bought. This producer-consumer pattern thus allows for the continuous sale of aluminum foil as it is consumed, and then needed again. There is, thus, a strong nature of use for aluminum foil from which proper need and thus worth is created.

However, most people do not immediately think of worth and money when they think of aluminum foil. They think of its most immediate use of wrapping food. However, this means that if most people associate it with wrapping food, then people's demand of aluminum foil will often be tied to that nature. So aluminum foil's worth or utility of obviously decided by how people think they will use it. However, by changing how we think we can use aluminum foil (say, for example, a very new and popular kid's toy requires a lot of aluminum foil), we can create a new use for how people can use it and thus create new demand for a new purpose towards its overall utility.

And finally, the alternative cost for aluminum foil is often just the cost of plastic foil or copper or something similar. They have similar costs; however, it may matter which is cheaper. Since aluminum foil can be easily replaced in its use, there is often no reason to buy it in the presence of cheaper plastic foil. So its cost can be very important for whether people buy it in, say, the grocery store.

Poll: Measure of Utility

Which of the five measures of utility are the most important?

See results

Applying Measure of Utility to Items

Ask yourself ten questions:

  1. On a scale of 0 to 1, how common do you think the item is?
  2. On a scale of 0 to 1, how unique is that item and its use cases?
  3. On a scale of 0 to 1, how needed is the item for its primary use case?
  4. How often is an item used over a time frame?
  5. On a scale of 0 to 1, how aware is your audience or customers aware of the product and its importance?
  6. On a scale of 0 to 1, how much more favorably is your item seen compared to other alternatives?
  7. On a scale of 0 to 1, how easy can you acquire the item using money?
  8. On a scale of 0 to 1, how much time does it cost to acquire an item?
  9. How often can you acquire an item over a certain amount of time?
  10. How motivated are you to acquire an item on a scale of 0 to 1?

Then, use the formula for the numbers generated by each question to get the final score:

utility score = (1 + 2 + (3*4) + 5 + 6) - (7 + (8*9) - 10)

This is simply one score that you can use! You can also multiply the appropriate factor by an actual cost or buying price in order to get better, real values tied to a price.

Types of Economies

Here are some different types of economies that you might encounter:

  • Closed vs. Open

Closed economies are systems where items or worth does not flow in or out easily. For example, the video game Habbo Hotel has a furniture economy that requires that most players buy all furniture with real money. This means that the measure of virtual money and furniture is tied to how players spend money in the game. The result is a closed economy with very low liquid capital unless you decide to invest your own.

Open economies are systems where items or worth flows in or out easily. A good example is the MMORPG (video game) MapleStory and its economy based on its virtual currency of mesos. Players can easily acquire capital by killing monsters, doing quests, or selling equipment they might get from drops. Money is also consumed by the system in the form of buying potions and equipment from shops.

For something like eBay or online webshops, we can consider most online stores as tied to the real world and thus open economies.

  • Virtual vs. Real

"Virtual" economies have their capital and worth decided by virtual items or artificial processes. Real economies have their capital and worth decided by real-world items or processes. For example, the game Second Life can be considered a real economy due to having its virtual money based on an exchange rate with real money, despite having transactions based on virtual goods, like costumes.

A virtual economy might be something like the video game distribution platform Steam and its trading card economy. Although its capital is tied to real money you deposit, the capital is actually first turned into Steam-exclusive credit that cannot be withdrawn and turned back into real money. Thus, the money is effectively virtual.

© 2016 Austin Tasato


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