The money market in online games

Reference: my note on classical view of money

Recently I'm playing an android app called Fantasica, what interested me is not about the RPG system or something similar, but the trading system. Besides the basic trading unit (let's call it money), there are two commodities that requires money in the real world to acquire (may drop from quests occasionally as well). Interestingly the main transaction unit is the commodities instead of money, which violates the classical view of barter economy. How can this happen?

Before we solve the above problem just revise the problem that came up with barter economy:
1)       Difficulty to quantitize its value because the value of a good is subjective, some goods like living things are hard to be divided
2)       High transaction cost, low transacted quantity
3)       Hard to meet double-coincidence of wants, that is, trader A wants trader B’s goods while trader B wants trader A’s goods. Also heterogeneity exist among goods, it may cause disagreement of the exchange.
4)       No standard of deferred payment and low durability: goods depreciates time to time so the value of goods in future is less foreseeable.

Or course the transaction unit that we're interested does not construct a barter economy. They serves as medium of trade, standard of deferred statement, bla bla bla and it's a commodity money. However commodity money still contain some of the disadvantage stated above, like the difficulty in quantitizing its value.

And now what's the difference between virtual world's economy and that of in the real world?
I. Inflation occurs in most of the time, distorted business cycle.

Where does the business cycle come from? It's all about productivity. When the standard of living raises, the productivity can't meet the increasing demand an inflation is going to happen as P for different goods is going to rise, or the demand is shifting from inferior good to superior good which increases the overall consumption.

The productivity is arguably constant in the virtual world. In typical RPG maps the monsters are appearing in constant rate, they do not vary with number of players online, and hence the maximum quantity of goods 'produced' or 'extracted' from the monsters has a upper limit. Assume the online game is mature enough so that the number of player is enough so that player killing rate = maximum monster appearing rate. (Inversely if the game is newly developed there should be a period with constant price index? Hmmm probably yes.)

On the demand factor side speaking strictly it really depends on how good the game is and how much it can attract players. "Number of players online at the same time" is a good measurement of active players and by experience the number of active players usually rise for quite a long time and then decay sharply, due to technological shift (e.g. 2D display to fake-3D display then 3D display). If we assume that the game community is growing the demand further pushes the price to increase.

II. Money or equivalent, has a negative nominal interest rate.

Looks obvious from the above point but there are more. In most games there exist a battle system that cost you quite a bit if you lose. Some maybe able to attack you (or your base, etc) without giving you any notice. In some games like Ogame in the past, refer this to resources getting robbed away as well.

The principle is, if you keep it in your hand, you're not earning anything from it.

Putting into the bank and earn interest? You must be kidding me...

III. Bank...

There is no bank in virtual game system. I should say there wouldn't be a bank that functions like reality in those games. It's because there're no motivation for them to exist.

Banks' elemental source of income is from making loans. In order to make loans they have to accept deposits and gives interest. In virtual game system there won't be such a service because the 'bank' as:

1) Not generating any real profit to the game team/owner.
2) Lack of methods to handle those who refuse to pay the loan. It's related to complicated financial system, as well as long law statements. The developer, of course, won't have time or not interested to develop similar stuffs as these are the stories of professional field.

Sometimes the 'bank' in the game system serves as a storage room saving money with zero nominal interest rate. Sounds fair?

IV. ...and money

The difference in nature of bank leads to another big difference: money does not conserve. We can treat the 'bank' as a super black hole which absorbs the money without changing itself (hence there's no need to make loans). The money actually conserves within the community, but the leakage is far too noticible. The NPC merchants, bank, and monsters can be simply treated as the NPC system as a whole, and they are functioning similarly: provide inflow and outflow of money into the community.

Even though the money system is quite strange, it doesn't affect as to apply QTM as well as the MD model.

What affects the money demand? As we discussed money really has a negative nominal interest rate and the need to transact using money is really low, let put the MD of assets as a constant.

For money demand of transaction, just analysis based on the factors changing MDt:
1) change in real GDP --- productivity related to number of active players.
2) price level increases --- which increases the MDt
3) Saving --- As a storage service bank ensures that the money saved has a zero nominal interest rate, people might save but there is no change in motivation in saving. Comparing with saving they'd rather turning them into other assets.
4) Time interval between two income recipts --- that makes a big difference as the income recipts is almost a continuous flow as the players kill monsters, that greatly reduces people's need for money.
5) Transaction technology --- the transaction itself costs nothing (unless you count the time used, etc), though the market information cost quite a bit.

In overall MD is possibly a steep lines and has no intersaction with MS in the positive nominal interest rate reigon. That explains why people prefer other commodity rather than keeping money.

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This is only a primary conclusion, but there're more to explore. Economics is not just applicable to questions on exams, they can be applied everywhere. With a bit of modification, observation and imgination it'd really works in different fields and situations that your textbook never tells you!