In the first of his promised weekly reports, Yanis Varoufakis, Valve’s new economist-in-residence, released his first analysis of a Valve game economy on Friday. In his inaugural post, Mr. Varoufakis analyzes the persistent opportunities for arbitrage in the game Team Fortress 2. I rather enjoyed the in-depth, data-driven discussion, which also raised an important question about the game industry’s exposure of internal economic data - the main focus of this post.
To summarize Varoufakis’ analysis in brief: Valve’s popular free-to-play, tongue-in-cheek first person shooter Team Fortress 2 (TF2) allows players to barter with one another, trading hats and guns for keys, earmuffs, and and sundry other virtual items. Mr. Varoufakis wondered whether there was evidence that this economy was anywhere near an equilibrium. If so, then there is no room for arbitrage, i.e. there’s no way to “sell high” or “buy low”. To put it another way, if the TF2 economy were in equilibrium, then every hat would be worth exactly x number of keys (say), no matter who you traded with. TF2’s economy, it turns out, is nowhere near this happy state.
There are two related sources of persistent disequilibrium here: one is the barter economy on which trade in TF2 is based, and the other is a lack of reliable information on trades. Mr. Varoufakis’s post includes a detailed discussion of how barter depends on a “double coincidence of wants”: You need to have what I want and I need to have what you want and we both must be willing to give those things up to one another. But when there are 35,000 items to choose from and trade, as in TF2, the composition of bargains can be quite complex. Even if information about every trade were available, it would still be hard for the average player to utilize it. Nevertheless, players are nothing if not innovative, so maybe they could find a way to take that raw information and make it useful. And so Mr. Varoufakis concludes with a question to players and readers: Should Valve tell you what TF2’s arbitrage opportunities are in real time?
Though aimed at players and readers, what Mr. Varoufakis has really posed is a fundamental question about the level of virtual economic disclosure that is most valuable to Valve. It’s a question that other successful game publishers have struggled with, as well. Blizzard-Activision broke ground last year when it started a community API for World of Warcraft that exposed massive amounts of information about the game world and the avatars in it. Yet information about Azeroth’s economy is limited to hourly snapshots of supply schedules -quantities and offer prices of items currently up for sale. With the release of Diablo III’s highly anticipated real money auction house (RMAH), community developers were expecting Blizzard to at least expose the same information they could get about the WoW economy. But they have been sorely disappointed. There is to be zero exposure of data from the RMAH. Meanwhile, CCP has also released historical information for its game, EVE Online, but only average prices per item per day, and it will not expose anything in real time. Sony Online Entertainment has made detailed economic data available only to a few researchers, who are bound by an NDA.
I've been able to find two arguments against this exposure. One comes from the game publishers, and it goes something like “Exposing sale prices would increase the amount of data that we would have to host, increasing storage, management, and bandwidth costs.” Fair enough, yet there’s an absence of compromise here: Could this information not be exposed for 24 hours, and then deleted?
The other group is the small cadre of players whose favorite past-time is playing the game’s economy. Whatever these players’ money-making methods are, economic success ultimately comes back to exploiting opportunities for arbitrage, and the greatest threat to arbitrage is a well-informed market. Their ability to profitably invest in particular markets would be severely hampered if information about going sale prices were actually available. Since these people are paying players and get their fun from playing the market, their (real) money is on the line for the game publisher.
Methinks, though, that there is some other, more subtle relationship driving this opacity, and I think it ultimately comes down to a not-so-obvious fact: Game publishers rely on enterprising players to mitigate the ups and downs of their virtual economies, and to recognize and provide for other players’ wants.
See, these market players don’t actually go out and farm for trade goods and other virtual items themselves. Instead, they create the incentives for other players to do so, and they expect a return on their investment. For example, by buying cloth when it is priced too low and posting it for higher prices, wealthy players encourage others to go out and farm cloth themselves and increase supply. Wealthy players may also take long-term positions in heavily traded items, so that they can take advantage of any price spikes. Such investment is incredibly important for major game events, like patches, which often significantly change the value and availability of certain items. And then there are the multiplicative effects of the actions of wealthy players: Every gold piece they spend is spent again several times over, raising the fortunes of everyone in the economy. There might even be a "fun multiplier": the market player has fun looking for opportunities, and the players who supply the market go out and quest, hang out with friends, etc., which is incidental to their collection activities.
So wealthy players ensure goods come to market, increase the fortunes of others, and prevent prices from spiking. But it’s not like the game company can’t perform this role instead… or is it? Early versions of Ultima Online’s economy (and Origin's business) suffered mightily at the hands of players whose vision of fun was different from what the developers intended. In fact, this seems to be one of the cardinal sins for game development. Developers are tool-makers and story-writers. They provide means and premises and environments. But there’s no way they can guess the outcome of the behavior of hundreds of thousands of individuals. To think otherwise is have the same pretensions as the architects of the Soviet economy.
Still, to justify an information blackout, wealthy players must be worth more than their subscription prices and item purchases to game publishers. Are they? I'd bet they are. Dmitri Williams is doing some cool stuff with his analytics engine over at Ninja Metrics that works on the same premise. Specifically, he has come up with a way to measure the value of players vis á vis their effect on the experiences of the other players that they come in contact with. For example, griefers reduce revenues by discouraging players from staying, while friendly or popular players increase revenues by encouraging other players to stay.
What I’ve been talking about falls exactly into this sort of groove. Wealthy players increase revenues by making it easier for players to access the things they want that make the game fun for them as individuals. So they increase revenues. But they also keep costs down for the publisher by recognizing impending shortages and getting the game economy to respond appropriately without any direct intervention from the publisher.
And so we return to Yanis Varoufakis's question: Should Valve make information on arbitrage opportunities available? Well, based on the preceding analysis, perhaps not. But there are two vital differences between most game economies and that of TF2: 1) it is a barter economy, and 2) game play is not vitally dependent on that economy. But markets are finicky things, and even changing this one little variable could mean millions of dollars in revenues for Valve. But will those millions in gains or millions in losses? Rest assured that Valve's billionaire-in-residence will have some thoughts on this one.
Virtual Economies: Is less information better? by Isaac Knowles, unless otherwise expressly stated, is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.