Fantasica: money in virtual world

This is basically a extension based my last entry money market in virtual world.

As discussed last time the game that I recently playing, Fantasica has a very low demand on money and people trade using commodity or even work in a barter economy instead of using money. The phenomenon has raised my interest and we can investigate them a bit.

I. Advantage of commodity money over inconvertible money

In virtual world all money can be treated as just a simple statistic of a certain player, and you might say all of them are electronic money. To make our classification easier we treat the game like happening in the real world and using the terms "commodity money", "flat money", etc. We would refer the official currency of virtual world as inconertible money to produce a complete simulation.

Why people use commodity instead of money to trade? The instant advantage is that the commodity itself can be consumed whenever necessary, but if you hold inconvertible money it costs you a bit in buying necessary commodity (transaction cost). Of course, this reduces cost and simulates player's decision towards holding commodity instead of currency.

There's a pre-requisite for the system to work:
The commodity available, in terms of turnover/volume transacted should be highly homogenous. That is, most of the barter trading among goods involves the same commodity. Let's say the commodity traded very frequenctly be X. Under such condition the double-coincidence problem is loosened (because X is always preferred though not necessary the first choice as a medium of trade, or they always hold a demand on X). When players used to trade with X the demand on it eventually shift from a simple demand on a goods to a money demand --- they story wealth, as a standard of deferred payment, etc.

The pre-requsite discussed is pretty ridiculous in real world so in real world the history shifts from commodity money to inconvertible money. However in Fantasica this ridiculous condition is satisfied with the commodity 'Time Elixir' which eliminates the cooldown time between battle (having more battle earns you more). They can be bought with real currency and sometimes from quests. The cards trading are highly hetrogeneous but TE is very much dominating the transaction volume so it becomes the trading unit.

There's also an interesting point to note: even in real world, the commodity supply is not a constant. With expected nominal interest rate to increase people produce more (in short run), so MS in such a case is a upgoing slope instead of a vertical line.
II. Artificial demand

With commodity over money as the medium of trading the demand on money is still non-zero. As the commodity can't be divided into smaller units, trading of cheaper goods still uses the official currency to settle the transaction. Some action like selling cards and killing monster still gives you the official currency. The problem is when the money demand is shifted the currency has nothing to fightback, to regain the position as the medium of transaction.

In virtual world there's no 'bank' by traditional means, and of course there're no financial tools like deposit, debts, etc. As a result the money supply keeps increasing and urged an steady inflation. However they're still means to obtain the excess currency from players: that is selling commodities. Goods like potions can be traded through the official curency, if necessary, at a lower price than the recognized price linked toward the goods' usefulness. It has several effects:

- Reduce money supply in the community and hence stabilize the price level and inflation in different ways as discussed.
- As a price indicator to currently trading goods, especially those priced with comodity instead of money. The goods that can be bought is of course less effective than those bought by real money, but they could have similar effects. In such a case the price of the two goods are linked up together. With the price of the currency traded goods well-controlled one can control the price of the rest of the good as well.
- The consequence of getting the power of pricing popular good is that you can eventually be able ot control the price of the commodity of the good recently used as the medium of trading.
- ... and the final step is making money the medium of trade again. By incresing the usefulness of currency now it has its own money demand, has a well-linked communication with other goods, has a more stable exchange rate...these could attract people using the official currency again.

In real world the government has no way to conduct such an action (under capitalism), but in virtual world the NPCs are under the control of the dev team, makind impossible things possible. As a said, NPC merchants, banks and monsters are all serving as one: controlling the currency flow. There are no traditional market operation for us to use but the difference in roles of banks/government allows us to make up imaginative action to regain currency.

III. The basis of money

At this point one interesting problem has come up: what 'backups' the currency?  USD is well recognized because of the fossil fuels and debts, HKD is backed up  with equivalent amount of USD. In traditional view the currency (flat money or certificates) is based on productivity. What supports the 'official currency'? Productivity comes from players killing monsters --- the problem is that the monster appearing rate is capped but the money is not conserved as the game fails to re-obtain money from players. Then the price of productivity unavoidably depreciates against money. On one side that explains the inflation, and on another side it means the traditional ways of production uneffective: that is, trading makes more profit than killing monsters. Though this is not the particular phenomenon but that could prodce a negative impact towards the game itself and make it unattractive.

IV. Social maximization?

So far we've discussed some problems as well as some possible measures. You may wonder that most measures we suggested is quite market-distrubing. In classical theory intervening the market create deadweight loss and is not beneficial to the market. Why should it happen here?

We should know clearly about a fact: running a game properly is not necessarily implying optimizing its economical development. Even every player in the game is simply poor it can still be a success. The team is not responsible to maximize your profit. It's your choice to put effort for it, and of course they're not responsible to maximize the social productivity.

So far we've talked about the particular reason that happened in Fantasica that leads to that weird situations (commodity instead of money) and made a few suggestions. However if you know Fantasica well you will know that these measures are not feasible outside theory --- because of the trading system, in which we will discuss next time.