Virtual Economies

Abstract

How the basic concepts of economics—including markets, institutions, and money—can be used to create and analyze economies based on virtual goods. In the twenty-first-century digital world, virtual goods are sold for real money. Digital game players happily pay for avatars, power-ups, and other game items. But behind every virtual sale, there is a virtual economy, simple or complex. In this book, Vili Lehdonvirta and Edward Castronova introduce the basic concepts of economics into the game developer's and game designer's toolkits. Lehdonvirta and Castronova explain how the fundamentals of economics—markets, institutions, and money—can be used to create or analyze economies based on artificially scarce virtual goods. They focus on virtual economies in digital games, but also touch on serious digital currencies such as Bitcoin as well as virtual economies that emerge in social media around points, likes, and followers. The theoretical emphasis is on elementary microeconomic theory, with some discussion of behavioral economics, macroeconomics, sociology of consumption, and other social science theories relevant to economic behavior. Topics include the rational choice model of economic decision making; information goods versus virtual goods; supply, demand, and market equilibrium; monopoly power; setting prices; and externalities. The book will enable developers and designers to create and maintain successful virtual economies, introduce social scientists and policy makers to the power of virtual economies, and provide a useful guide to economic fundamentals for students in other disciplines.

Materializing digital collecting: An extended view of digital materiality

“…Processes of material configuration can introduce object elusiveness by requiring consumers to invest time and effort in their acquisition. In their work on virtual economies, Lehdonvirta and Castronova (2014) describe this as the creation of a time aristocracy (those who invest the most time acquire the best items and thus higher social status) rather than a money aristocracy (those who invest the most money acquire these items). We argue that in materially configuring digital consumption objects as elusive, companies may facilitate those pleasures of collecting that stem from object elusiveness.…”

“…In contrast to material scarcity in which demand outstrips natural supply, in the context of digital consumption objects scarcity must be artificially created (similar techniques are also used in the context of material collections in the form of ‘limited editions’, see Belk, 1995a). Virtual worlds and video games frequently impose quantity-based artificial scarcity by limiting the number of copies available, increasing items’ rarity and elevating their perceived value (Hamari and Lehdonvirta, 2010; Lehdonvirta and Castronova, 2014). For instance, Lehdonvirta et al (2009) describe the creation of artificial scarcity within teen virtual world Habbo Hotel, where ‘collectibles’ are placed on sale for limited periods of time, sometimes as briefly as 2 hours, and in limited quantities (Lehdonvirta et al, 2009).…”

“…For instance, the developers of video game Ultima Online created a small amount of digital horse dung to add ambiance to the stables within the game world; however, because the digital horses were not designed to produce further dung, the supply was limited to approximately one piece per 30,000 players (Lehdonvirta and Castronova, 2014). Due to the rarity of this functionless dung, an item that was never intended by designers to hold any in-game value, or indeed even to be acquired by users, became a status symbol within the game, traded for large quantities of in-game currency, envied by others and often displayed with intense pride (Lehdonvirta and Castronova, 2014). Again, quantity-based artificial scarcity, in this instance unintentionally, materialized the digital consumption object as elusive and thus as desirable and valuable.…”

“…First, mechanisms of object circulation enable singular biographies to unfold for digital consumption objects as they are transferred between consumers rather than duplicated. Video games are one context in which transfer mechanisms are regularly implemented, enabling not only trading, gifting and resale in-game but also the formation of secondary markets where digital objects are exchanged for ‘real-world’ money (see Lehdonvirta and Castronova, 2014). Object circulation not only creates virtual economies but also facilitates indexical meanings.…”

Virtual trade between separated time zones and growth

“…Thanks to the growth of satellite and computer technology, online transactions have flooded the global market. For an overview of this radical phenomenon, see Lehdonvirta and Castronova (). It is well recognized that India's phenomenal growth at the turn of the century, outstripping the legacy of the so‐called Hindu rate of growth, owes a great deal to the growth in the service sector, in which IT services are extraordinarily important.…”