A Lesson in Economics From MMORPGs

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Written by: Nic Haussamer

Online role-playing games form worlds in which you are completely on your own – except for the fact that this is only ostensibly true. Somewhere down the line (and quite soon, in most cases), the player will find that they need to acquire some items to progress. This leaves them with two choices: retrieve or make the item(s) in question yourself, or trade with someone else, using that which you already have. Always seeking to reduce ‘unnecessary’ effort, most people will find themselves choosing the latter option – thus the in-game market economy is born.

The result is millions of players from all around the world – most of whom do not know each other – creating and trading goods. It’s fascinating to observe, and illustrates some interesting ideas in economics.

Here we will consider some of these similarities to (and differences from) the real-world economy by looking at the ‘Old School’ version of the popular MMORPG, Runescape.

Some context

Runescape is a fantasy game set in a medieval-like era. You play as a particular character, whose skills you can develop and through whom you can complete various quests. An important aspect of the game is combat – fighting monsters and other players. Each player can develop their character as a ‘mage’ (wizard), ‘ranger’ (archer), or melee fighter (or any combination of those three). Whilst fighting, ‘skilling’ and ‘questing’, players find themselves in need of many items, which is why the economy is so important in Runescape.

As in reality, money makes the world go round in Runescape. The primary currency is gold pieces, known also as ‘gp’, ‘gold’, or ‘coins’. GP is, of course, the medium of exchange in the game.

On the matter of exchange, our focus will be the Grand Exchange (GE). The GE is the central market whereby players exchange items. The exchange itself has a particular location in-game, and players need to go there to place their buy and sell offers for items. It is one of the busiest locations in the game, but players need not wait around for their orders to be processed, and can head off to do other things while they wait.

The GE, which is an automated system, matches buyers and sellers, and facilitates the exchange between the two parties. All players have access to the same information via the Exchange – including trading prices, past trends, trading volumes, and so on.

Choosing what to make

Most productive endeavours in Runescape are undertaken with certain goals in mind: making a profit (usually to buy better items later on), improving one’s skills (‘skilling’), or doing both simultaneously. This all comes with a caveat, though: as in the real world, trade-offs are fully applicable in Runescape. Items that can be made for a profit generally provide very little skill experience, and vice versa. In fact, players often incur losses in order to optimise their skilling.

Price signals

When choosing what to produce for maximum profit, players need certain information.

How much ore is being mined and collected? Is there demand for refined metal bars? What kind of food do people need made? Are the ingredients for that food readily available, or are they better-used elsewhere? Which arrows do archers prefer using? Can I buy the logs required to make them, and still make them profitably?

The true beauty of the GE is the way in which it brings the many Runescape players together to trade, and through trading, the market participants influence prices. These prices give players the answers to the crucial questions (such as those above) about production – but most importantly, all of the relevant information is captured by the market price of goods, so that players don’t need to go out in search of other information when deciding what to make.

For example, say there is a game update that generally causes players to mine less and follow other pursuits more. As the supply of mined ore decreases, and assuming demand remains fairly constant in the market, the price of ore would increase. Players then looking for profitable activities, without even knowing the chain of events that lead to that price increase, would see that mining is an attractive activity for making money.

The ability of prices to capture and convey all relevant information is why prices are referred to as a ‘signal’. The Runescape economy closely resembles the real-world economy in this way.

Structure of production

Much of the complexity of the modern (real-world) economy exists in the structure of production. This refers to the various stages of production, processes and goods required to produce the final product. Below is an example of the structure of production for bread:

Production in Runescape is much simpler than in reality.

Physical capital – such as furnaces, anvils, ovens, and so on – exists in specific locations and can be used by anyone. It cannot be moved or traded, and players do not need to pay to use it. Furthermore, most final goods only require one or two ‘raw’ goods to make.

Nonetheless, players still need to make considerable ‘investments’ in order to produce certain goods, since the ability to produce certain items will depend on the player’s level of a particular skill. Skilling can require a lot of time and, often, a lot of money.

Even though some items may require higher skills to produce, there is only one way to produce them. Unlike in the real world, players do not need to choose between several different methods of production, or different combinations of processes. In this regard, the Runescape economy is very different from our own.

Arbitrage

One of the more interesting aspects of the Runescape economy is (seemingly) the presence of arbitrage opportunities.

For those not familiar with the term, an ‘arbitrage opportunity’ is defined as an opportunity to make a risk-free trading profit. Theoretically, this means that:

1) you are able to set up an investment portfolio at no cost (this includes no capital investment);

2) you have zero probability of losing money on the investment portfolio; and

3) you have some chance of actually making a profit.

To put it simply, an arbitrage opportunity is a ‘free lunch’. Essentially, these opportunities arise because one or several assets are 'mispriced' in the market.

The inability to borrow money easily (as well as some other conditions not holding) technically renders arbitrage impossible in Runescape. However, there are still some transactions that closely resemble arbitrage, and they will be discussed as such.

1) Apparent opportunities:

The best example of an apparent ‘arbitrage’ opportunity is seen with magic longbows. They currently trade for around 1450gp each on the GE. By casting a spell called ‘High Level Alchemy’ on magic longbows, players can convert the longbow into 1536gp. In effect, this is like buying an asset in one market, and selling it at a higher price in another.

The reason this is only an apparent ‘arbitrage’ opportunity, though, is because the spell cast has a cost of about 350gp. This effectively represents a transaction cost, and since it exceeds the potential arbitrage profit per item, this method cannot be exploited for profit. The inability to exploit arbitrage opportunities because of transaction- and other costs occurs in real-world financial markets as well.

2) Real opportunities:

Some items lend themselves very well to arbitrage-like trades. One example is air runes – a staple for players who use magic in-game. An air-rune ‘arbitrageur’ would typically buy air runes at (say) 4gp each, and sell them at 5gp or 6gp each for a profit.

The reason they are able to do this is because some players, when selling items at the GE, set their offer at a price below the average market price in order to sell quickly, while others offer to buy at a price above the market average in order to buy quickly. Here, the ‘arbitrageur’ is essentially benefitting from others’ impatience.

Concluding thoughts

As stated at the outset, the economics of online gaming can be fascinating to observe. We’ve seen how in-game economies sometimes resemble, and in other ways differ from, the real-world economy. There is certainly much to be observed and learned about economics just from playing such games, and this, in turn, should prompt one to think about how much more complex the real-world economy actually is – especially since the consequences of real-world economic outcomes are so much more significant.

Nic Haussamer is a Rational Standard contributor.