Economics, Research and Virtual Worlds

One area of interest in virtual worlds is the study of their economies. Such studies tend to have two approaches: study of virtual economies for their own sake, and study of virtual economies as a method for illuminating external / hard currency economies.

This is a short guide to resources for those interested in either aspect of virtual world economics.

Contents

  1. Edward Castronova
  2. VERN
  3. Economics – questions and meta-questions
  4. The nature of virtual goods

Edward Castronova

Edward Castronova is generally credited with being the first person to study virtual economics seriously. This stems from his foundational paper “Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier” which was widely reported and largely misreported by the media.
The key statics that was miss reported was the finding that the productivity of Sony Online’s EverQuest was about “$2,000 in terms of annual GDP per capita” which makes EverQuest more productive than Russia. This was reported as a finding that economy of EverQuest being larger than Russia. Reports that Dr Castronova has described as “Absurd. No virtual economy could outproduce, in gross terms, Russia’s hundred-million-worker economy.” The key words that the reporters failed to understand were ‘per capia’.

Since this work both Dr Castronova and Julian Dibbell have worked on GDP comparators

In 2004 Castronova reported [on TerraNova]:

In other words, the virtual economy would be roughly equivalent to the economy of Namibia or Macedonia, in terms of its overall role and position in the real global economy. It may be catching up to Jamaica.

In 2005 Dibbell updated this and looked at the economy of all  MMO’s together stating [on TerraNova] that it can be seen in a number of ways as follows:

Role players and other valiant defenders of the magic circle may go with the PPP rankings, which place the virtual world economy 134th among the planet’s 185 national economies, right between Benin ($7.49 billion) and Malta ($7.04 billion).
Farmers, powergamers, and other dedicated breakers of immersion should use the exchange-rate rankings, which move things up to 101st place, between Jamaica ($7.88 billion) and Estonia ($7.28 billion).
And finally, IGE fanbois, whoever you are, should feel free to plug Steve Salyer’s numbers into the formula, for a total GDP of $11.88 billion and an exchange-rate ranking of 86th place – not quite as good as Panama ($12.127 billion) but better than Côte d’Ivoire ($11.12 billion) and, for that matter, over half of the world’s sovereign nations. You go!

And then again in 2007, Dibbell re-stated [on TerraNova]:

Take VERN’s final calculation of $2.09 billion for total RMT, multiply by 13.5, and voilà. The official total worldwide virtual GDP now stands at $28.215 billion—several ranks higher than Albania and Nepal, all the way up in the lofty precincts of Lithuania ($29.784 billion), Sri Lanka ($26.794 billion), and Lebanon ($22.622 billion).

Castronova’s key works

Castronova, E., Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier. 2001. PDF. Social Science Research Network Electronic Library. Available: http://papers. ssrn. com/abstract, 294828.
Castronova, E., 2004. Right to Play, The. NYL Sch. L. Rev., 49, 185.Castronova, E. 2004. The price of bodies: A hedonic pricing model of avatar attributes in a synthetic world. Kyklos, 57(2), 173-196.
Castronova, E., 2005. Synthetic Worlds: The Business and Culture of Online Games, University Of Chicago Press.
Castronova, E., 2006. On the research value of large games: Natural experiments in Norrath and Camelot. Games and Culture, 1(2), 163.
Castronova, E., 2006. A cost-benefit analysis of real-money trade in the products of synthetic economies. INFO-CAMBRIDGE-CAMFORD PUBLISHING LIMITED-, 8(6), 51.
Castronova, E., 2007. Exodus to the Virtual World: How Online Fun Is Changing Reality, New York, NY: Palgrave MacMillan.
Castronova, E. et al., 2009. As real as real? Macroeconomic behavior in a large-scale virtual world. New Media Society, 11(5), 685-707. Available at: http://nms.sagepub.com/cgi/content/abstract/11/5/685 [Accessed January 12, 2010].
Castronova, E., A test of the law of demand in a virtual world: Exploring the petri dish approach to social science.
Castronova, E., The price of’man’and’woman’: A hedonic pricing model of avatar attributes in a synthethic world.

Virtual Economy Research Network & Vili Lehdonvirta

The Virtual Economy Research Network is a web site run by a number of researchers including Vili Lehdonvirta, it can be found at: http://virtual-economy.org/

Vili Lehdonvirta’s PHD thesis: Virtual Consumption. Publications of the Turku School of Economics, can also be found on the site, see abstract below:

Millions of people are spending real money on virtual clothes in online hangouts, digital items in multiplayer games and presents for their friends in social networking sites. This digitalisation of consumption is an inherent consequence of the increasing involvement of communication technology in everyday social activities, says Helsinki Insititute for Information Technology HIIT Researcher Vili Lehdonvirta. Lehdonvirta’s thesis “Virtual Consumption” will be examined on 30 October at Turku School of Economics, Finland.

- You don’t have to be an Internet addict or live in an online community to appreciate virtual goods. Today, around 10 percent of users in a typical online service are likely to be spending money on microtransactions, such as virtual items and gifts. Much of this spending relates to social activities involving friends and family, says Lehdonvirta.

In public discourse, spending real money on virtual goods is frequently dismissed as an irrational fad or as a result of abusive marketing. But Lehdonvirta’s thesis suggests that the fundamental drivers of virtual consumption are found in individuals’ social and hedonic motivations.

- People buy virtual goods for the same reasons as they buy material goods. In online spaces, virtual goods can function as markers of status, elements of identity and means towards ends in the same way as material consumer goods do in similarly contrived physical spaces, says Lehdonvirta.

In his doctoral thesis, Lehdonvirta also considers the economic and ecological consequences of the digitalisation of consumption. According to Lehdonvirta, the present economic downturn may turn out to be a boost to virtual consumption, because consumers spend more time at home and favour small purchases over large ones. The ecological sustainability of virtual consumption depends on whether it continues to spur additional computer hardware purchases or whether it substitutes material consumption by providing an alternative use for money.

- From a macroeconomic perspective, it does not matter what consumers buy, as long as they keep on spending. Virtual consumption might offer an ecological way out of this consumer society’s dilemma, says Lehdonvirta.

According to Lehdonvirta’s thesis, people in East Asian countries such as Korea, China and Japan have been quicker to adopt virtual consumption styles.

- What is considered as an appropriate way to spend your time and money varies between cultures and changes over time. Perhaps in three years’ time, virtual consumption is considered rational in the West, and the rationality of filling your house with expensive objects starts to be questioned, ponders Lehdonvirta.

http://virtual-economy.org/blog/virtual_consumption_the_thesis
Vili Lehdonvirta (2009). Virtual Consumption. Publications of the Turku School of Economics, A-11:2009, Turku. ISBN: 978-952-249-019-3 (printed) 978-952-249-020-9 (electronic) ISSN: 0357-4652 (printed) 1459-4870 (electronic)

Economics – questions and meta-questions

Other key works that look at Economic and virtual worlds or ask the meta-question of the validity of such studies:

Bainbridge, W.S., 2009. Online Worlds: Convergence of the Real and the Virtual, Springer-Verlag New York Inc.
Bloomfield, R. & Hales, J., 2009. An Experimental Investigation of the Positive and Negative Effects of Mutual Observation. The Accounting Review, 84(2). Available at: http://www.johnson.cornell.edu/faculty/profiles/bloomfield/ [Accessed February 12, 2010].
Bloomfield, R. & Rennekamp, K., 2008. Experimental Research on Financial Reporting: From the Laboratory to the Virtual World. Foundations and Trends in Accounting, 3(2).
Camp, B (2007), The Play’s The Thing: A Theory of Taxing Virtual Worlds, 59 Hastings L. J. 1
Ducheneaut, N., 2009. Massively Multiplayer Online Games as Living Laboratories: Opportunities and Pitfalls. Online Worlds: Convergence of the Real and the Virtual, 135.
Williams, D. (2009). The mapping principle, and a research framework for virtual worlds. University of Southern California/TerraNova

http://dmitriwilliams.com/MappingTNWhitePaper.pdf

The nature of virtual goods

Initial discussions about virtual goods for those not familiar with the concept tend to center on the notion that virtual goods are some how not ‘real’ and thus there is no logical basis for them having value. This rhetoric rests on at least two false assumptions, first that things that are virtual are simply not real; second that we commonly determine value based materiality of a good. On the second of these there are numerous works that illustrate how value is based on many factors of a largely symbolic nature – from which we can understand that virtual items derive their value from just the same root as any good and particularly any branded good:

Eco, U., 1995. Faith in Fakes: Travels in Hyperreality, Vintage.
Featherstone, P.M., 2007. Consumer Culture and Postmodernism 2nd ed., Sage Publications Ltd.
Friedman, D., Steed, A. & Slater, M., 2007. Spatial social behavior in second life. Lecture Notes in Computer Science, 4722, 252
Searle, J.R., 1997. The Construction of Social Reality, Free Press.

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