Designing Inflation-Resistant Video Game Economies

February 1, 2022

Animal Crossing: New Horizons was probably the most talked-about game in 2020. This acclaimed life simulation game provided a fun and novel social experience for a world adjusting to the social isolation in lockdowns. 

Along with the new and old friendships flourishing on deserted islands, something extraordinary also happened parallel to the in-game activities. Players all over the globe created their own platforms to trade virtual items with both virtual and real money. Early after the game’s launch, a player could buy a piece of collectible furniture with a full bag of Bells (the default circulating currency in ACNH). A week later, the price was two bags. Before long, the prices became so high that players did not have enough space in their backpacks to carry the money they needed to complete a trade. Just like the clever citizens in Iran, Venezuela, and Zimbabwe under hyperinflation, they gave up the prevailing currency (Bell) and switched to something with a more stable value instead. 

Broadly defined, this type of inflation is present in almost every MMO (Massively Multiplayer Online) game that allows some form of an open economy. These virtual economies and their problems are not to be taken lightly if only for their sheer sizes. Nielsen predicts that gamers will spend up to $129bn of fiat currency in 2021 acquiring virtual currencies for in-game purchases.  Understanding the economics of inflation and mechanisms to address it is therefore essential. This blog post will focus on the price movements in the unofficial marketplaces and offer insights from economics about understanding and managing run-away inflation in games. 

At Prysm Group, we specialize in designing the appropriate economic incentives to sustain well-functioning marketplaces. We believe the powerful toolbox that improved millions of lives by guiding auction design, school matching, and e-commerce platforms can also help game developers get their economic systems right at the onset. In-game economies can maximize enjoyment for the players rather than create nuisances to be managed. 

What is inflation?

In economics, inflation is a general rise in the price level in an economy. When the general price level rises, each unit of currency buys fewer goods and services. In a game economy, inflation typically appears in secondary markets, where players trade among themselves. The players are able to buy fewer items for a given amount of the game’s virtual currency.

Why does inflation occur?

In almost every game, there is a primary market where players can buy and sell virtual objects from NPC vendors set up by the developer. The NPC vendors typically pay a fixed price for one unit of an item, regardless of the quantity being traded. So, unless there are mechanisms to prevent such behavior, a player can earn an infinite amount of money by repeatedly exploiting the resource generation mechanics in a game and selling the rewards to NPCs for more virtual currency. And this is the fundamental cause of inflationary phenomena. 

Economics offers two complementary perspectives to explain why injecting more money into a game economy can cause general price levels to rise. 

On a macro level, it is helpful to think about the quantity theory of money (QTM), which was popularized in its modern version by Nobel-winning economist Milton Friedman. According to the QTM, there is a close and stable association between inflation and the money supply. When the total amount of money doubles in an economy, the general price level will also roughly double after the necessary market adjustments. 

On a micro level, market prices are governed by the law of supply and demand. For a given virtual item, each potential seller has a minimum price at which they are willing to give up their goods. Similarly, each potential buyer has a maximum price they are willing to pay. These preferences, aggregated over all buyers and sellers, define the supply and demand curves so familiar from economics. As the market price increases, the number of goods supplied for sale increases, and the number of goods demanded for purchase decreases. Typically, the supply equals demand at the market price so that no unsatisfied trader will want to buy at a higher price or sell at a lower one.

As all players accumulate more currency over time, they can now spend more in secondary markets. At any given price, more players will be willing to buy. So the market price will have to adjust in order to rebalance supply and demand. Importantly, in this model, the price adjustments in response to inflation can be uneven across items, depending on their elasticities of supply. An item’s supply is elastic if it changes by a larger percentage in response to a price change and inelastic if it changes by a smaller percentage (see graph below). Suppose sellers can obtain an infinite number of an item at a constant unit cost — for example, the regular flower seeds in Animal Crossing or basic healing potions in an RPG. In that case, they can easily satisfy the increase in demand without causing a price increase. On the other extreme, for an item with fixed supply, such as a limited edition rare item, price increases caused by inflation can be significant.  

Source: World Integrated Trade Solution, The World Bank


Why is inflation bad?

The conventional wisdom in the gaming industry puts more focus on how inflation directly affects player acquisition. While established players are less affected or even benefit from inflation, new players who are overwhelmingly buyers will find the game less approachable. If inflation becomes so severe that it prices new players out of the secondary markets entirely, the publisher might have to face a stagnant player base that shrinks over time. 

A less obvious negative impact of inflation is the distortion of in-game economic activities. As mentioned above, market prices contain essential information about supply and demand. They tell players how items are valued relative to each other and guide producers to generate the goods most desired by the other players. 

Suppose that prices of everything, including rewards from gameplay, double overnight. The players may be able to keep doing what they were doing without thinking twice. However, prices rarely increase uniformly. When the relative prices change in a game, so do the incentives to engage in various activities in the game. Severe inflation can undermine the game balance and even push players to concentrate on tedious farming activities contrary to the original intentions of the developer. 

A case in point is Planet Zoo. The costs of rare animals inflated so quickly that money became practically worthless. Players traded exclusively in another resource called Conservation Credits. In order to earn enough CCs to buy the cool animals that make the game worthwhile, players had to breed and then release endangered animals. But the problem was, there was no rare animal to breed if the zoo did not already have a pair to begin with. Thus many early-stage players had to grind out millions of warthogs, ostriches, and Indian peafowl until they could live the game’s promise of “build your own zoo, with whatever you like in it.”

How can inflation threats be mitigated?

The most common approach currently used to address in-game inflation is to treat it as an adjustable parameter in playtesting and iterative game balancing. Following the intuition from QTM, developers introduce features for money destruction in new updates when they think inflation is out of hand. Such an ad hoc approach comes with a significant lag and does not stabilize prices even for otherwise well-designed games like World of Warcraft or Diablo 3. 

Some more sophisticated developers learn from the history of money by pegging their soft in-game currency to something with fixed real-world values. For example, the game EVE online allows players to purchase monthly subscriptions (PLEX) with the in-game currency ISK. In doing so, the publisher CCP Games keeps inflation in check by ensuring the ISK has a minimum USD value. This is not without cost, however — the game foregoes some revenues from game subscriptions that are paid in ISK but would otherwise be paid in USD or other fiat currencies. 

Based on economic studies of inflation in real and virtual economies, we propose three more principles for inflation management. Unlike many of the existing solutions, these are structural approaches that can be introduced in the early stages of game design to alleviate the need for ad hoc sinks and pegs.

Timely detection of inflation: Developers on the lookout for inflation should not wait to intervene until they receive massive complaints from disgruntled players. There are leading indicators they could track.  First, they can look out for concentrated farming activities.  Second, they can monitor for price surges in items with fixed or inelastic supplies.  Finally, they can be alert to the emergence of substitute media of exchange. 

If a quest or a raid is being farmed a lot more than developers expected, it may be because some smart players have figured out the best way to make money. They will generate more money faster than what the designers have planned, which will eventually translate to higher prices. As we have discussed in the section about supply and demand, prices do not rise uniformly with the money supply. Tracking the prices of rare items will allow the developers to spot ongoing inflation before it becomes more visible in common commodities. When players collectively use something else for trade, hyperinflation is a likely culprit. In this case, the default currency has lost its function as a unit of account, and the game economy may need a major overhaul. 

Public disclosure and forward guidance: Real-world inflation is often caused by positive feedback loops and self-fulfilling expectations. Some economists contribute the recent success of the Federal Reserve in managing inflation to its commitment to forward guidance. The Fed explicitly communicates its future policy intentions to influence economic conditions today. As game developers serve as digital central bankers of their virtual worlds, they can also use a similar method to create anti-inflationary expectations. Bitcoin, for example, is governed by a simple mathematical formula that guarantees the difficulty of mining tasks and the rate of coin generation follows a predictable path into eternity. This explicitly specified, limited supply is a major driver of Bitcoin’s attractiveness as an inflation hedge. 

Market Design: Last but not least, developers should explicitly think about economic incentives and market structures, just as they carefully balance pacing, power curves, and drop rates. If economic considerations are brought in as a second thought, trading opportunities and market mechanisms can invalidate otherwise perfectly balanced parameters in a single-player version of the game. 

Designing well-functioning marketplaces is a complex problem that does not come with a one-size-fits-all solution. An economist will have to decide the relative importance of the terms of trade, pricing mechanisms, and matching traders depending on the purpose of a market. 

As an attempt to offer a richer gaming experience and to reduce security threats on third-party trading sites, Diablo 3 integrated player-to-player trading into its economy through a two-tier Auction House. Although auctions provided an efficient way to reallocate items in the economy, they were soon acknowledged as a failure that undermined a fundamental aspect of gameplay. Excessive trading opportunities created a shortcut in the game’s reward loop — so much so that players spent less time battling monsters to farm the loot they wanted and more time trading in the Auction House. Eventually, Blizzard had to shut down the trading functionality with almost unanimous player support. It might have turned out differently if the marketplaces had been designed— to prevent speculation from becoming the most lucrative activity in the game — such as by implementing transaction fees or mild trade restrictions.

Inflation is just one of the many challenges game developers face when introducing economic mechanisms that support gameplay and enhance social interactions. The iterative trial-and-error approach to game design has helped address these challenges to varying degrees. However, as in-game marketplaces continually grow in complexity and gamers accumulate more financial stake in their games, balancing multiple economic policy objectives will require a more systematic approach. As a result, we expect to see more game design decisions informed by lessons from specialized branches of economics, such as market design, finance, and international trade.

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