I don't understand where inflation occurs in a video games. Assuming "free market" ie unlimited new players can enter any universe at will. You will say that for an economy to form, both sides must be willing to trade. This is true, here a player trades working hours for gold (g).

Universe A:

  • working for 1 hour (killing rats) rewards 1g.
  • a sword can be bought for 10g.

    1. does inflation occur ?
      Time required to buy a sword will always be the same ~ 10 Hours.
      New players will have to exert the same effort as old players to get a sword in universe A.

    Universe B:

  • Denizens of universe B can buy swords from universe A for 10g + 4g (transpotation fees).
  • working for 1 hour (killing slimes) destroys a sword and rewards 15g.
  • slime jars can be produced for 10g.

    1. Does inflation occur?
      Both citizens get the same profit for their hourly work = 1g per hour.
      Is this what they call zero sum rule? workers sacrifice 1 hour for 1g.

    Universe C:

  • Aliens can buy slime jars from Universe B for 10g (teleportation magic).
  • Alien have to eat slime jars every hour or die.
  • Aliens produce 20g by materializing matter out of thin air.

    1. Does inflation occur?
      Aliens get x10 gold per hour for their work. Is this what they call inflation? But humans lack the capacity for such feat, shouldn't alien be paid more?

    Universe D: modify universe C as follows:

  • A weather effect blocks teleportation magic. We dont know how long it will last.
  • Buying slime jars from B now costs 21g.

    1. Does Inflation or Deflation occur?
      aliens now lose money instead gaining. they lose -1g even if they work. Shouldn't they have been paid more in the first place for the risk they took eg dying if they run out slime jars.

    2. Assuming infinite years pass, and the weather condition pattern is 100% known. What should be a fair alien wage? Approximate 0 if averaged out, same as humans (1g) or more ?

    Universe E: mmorpg simulation. Assume this world becomes available after 1000 years

  • Everyone can switch to this universe by paying 10g.
  • Working accumulates experience and increases productivity. Every 10 hours switch to the next level.
  • Lv0. Working produces 0g per hour.
  • Lv1. Working produces 0.1g per hour.
  • Lv2. Working produces 1g per hour.
  • Lv3. Working produces 10g per hour.
  • Cap. No more levels.

    1. Does this cause inflation?
    2. What will happen to the rest of the world if introduced.
    3. Since the level is capped. This means that inflation also has a maximum cap = new player vs old player money profit for hourly wage.

    Universe F: modify universe E as follows:

  • a time hole speeds aging: Creatures living in it have a finite lifespan of 1 month.

    1. Does this cause inflation?
    2. What should be a fair wage? Approximate 0 if averaged out, same as humans (1g) or more ?

    11. Can other types of economy form in video games? Seems to me that all economies in games are "free markets" with an initial entrance fee. There is no competition. The rewards remain the same for everyone regardless of the amount of workers that enter a universe. This is because in a game goods are produced from thin air. Will markets with competition make sense ? or will new players be harshly punished for arriving to play the game too late?

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    • $\begingroup$ I think you should be ok cross-post this question on the gamedevelopment or worldbuilding site. It's been long enough since you posted the question that it should be fine. $\endgroup$
      – jmbejara
      Feb 3 '17 at 22:19

    You seem to think of a game where objects are obtained at a fixed rate by farming. Fix supply of work for a certain object (bc. Only a few people know where to find things to farm or are high enough level or have the right profession) and increase demand (new players coming in or more players buying in game currency for real money) then prices for the object will soar over time, people producing the object will find it easier to sell it, so much so that they will increase the price until people stop buying it. This will inflate the price of the object. Whether this will last over longer period of time then depends on many factors : ability of supply to adjust (e.g. How much are player willing to switch to farming that object?), rate of new player characters coming in, their propensity to buy the object etc.

    There are many other ways. One example I could think of: as a player on a WoW private server with moderate population I would routinely buy all objects from the auction house that I thought of as undervalued and put them back in auction at higher prices. This allowed me to gain arbitrage profit from less careful players and also to craft and sell the same object at higher prices.

    • $\begingroup$ The supply limits in world of warcraft you mentioned have a finete duration until they are overcome by a new player. Leveling takes 7 days to reach the cap, and farm locations can be learned from various sites. So this is a barrier to entry that only requires a time investment to overcome, after that it becomes free market. Since they are infinite goods and the time to produce them is always the same, gold prices should never increase and remain constant. I think it is a paradox how warcraft managed to increase the gold prices and create inflation. Propably a bug created by duping items. $\endgroup$ Dec 11 '16 at 19:59
    • $\begingroup$ We only see a finite number of player playing for a finite amount of time, and players change over time. Maybe there shouldn't be inflation in the steady state but the game is constantly buffeted away from it, either by demographics of players or by... New expansions in which those limits are renewed $\endgroup$
      – Three Diag
      Dec 11 '16 at 20:05
    • $\begingroup$ what i am saying above is that the supply curve will remain the same, even after 1.000.000 years in wow. Now for the demand curve, it wont stay the same, because lower level item crafting gets invalidated, those items will reach 0 demand over time. New players population will also stop over time, as only 8 billion humans exist in earth. This will cause deflation, items will get cheaper, since everyone will want to sell their items to create inventory space. Thus overtime it may be possible to buy the latest armor almost for free [vendor sell price]. $\endgroup$ Dec 11 '16 at 20:06
    • $\begingroup$ @user2186597 The resources are scarce and the demand for them varied. It's a complex dynamic system that changes all the time, not just when a new expansion comes out. The supply curve is not the same - it depends on the supply and demand of everything else you can do in the game. That's what prices are for - they are bits of information. If there's too much demand for roses, their price rises and more people start harvesting roses which causes the price to go down again. if the whole system wasn't so dynamic, it would settle into an equilibrium with "fixed prices" on its own eventually. $\endgroup$
      – Luaan
      Dec 18 '16 at 15:01

    There are too many questions to play out each situation individually (and not enough information given in each scenario either), but we can answer your underlying question. What causes inflation within game economies?

    Inflation is just sustained price increases. The way inflation increases is by increasing the money supply, or making it easier to borrow money. Most online games I know don't have any proper banking system, and my rough guess is that places don't create informal banking sectors. Assuming that, we are left with just money supply.

    Unless the amount of money players gain from killing monsters and doing quests is exactly offset by how much gold is sunk into NPC vendors, then there will be inflation if players are gaining too much gold.

    • $\begingroup$ Every hour, the total gold to the whole universe increases by total_workers * worker_wage (created by thin air). So there is no inflation because the total gold in a universe increases with the same deterministic way. People "store" their provided work in the form of gold. Prices for goods are always the same which is the proof that inflation doesnt exist. $\endgroup$ Dec 11 '16 at 5:56
    • 2
      $\begingroup$ Nominal prices are the same because they are fixed by a command economy (developers). Real prices will rise though as the value of goods depreciate. Inflation will show itself in other ways. And just because gold increases in a known way doesn't mean there won't be inflation. People knew the Zimbabwe government in the 1990s was printing absurd amounts of money, and look what happened to them. Price fixing didn't help either. $\endgroup$
      – Kitsune Cavalry
      Dec 11 '16 at 6:15
    • $\begingroup$ This happened to zimbabwe because the creation speed of money was > the creation speed of goods. If both had the same creation curves eg both goods and money were an ascending function and increased with the same proportion, then would inflation be possible? $\endgroup$ Dec 11 '16 at 7:03
    • $\begingroup$ You're conflating two different effects. The supply of more goods as an exogenous shock to production will decrease prices and can offset price rises from money creation, yes. But increases in real productivity to create more goods is not exogenous to inflation in this case. The relationship between money creation and goods creation is not as straightforward as you make it out to be. Even if their increases were "proportional" as you say, there could still be inflation. $\endgroup$
      – Kitsune Cavalry
      Dec 11 '16 at 7:07

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