CASE HISTORIES AND ANALYSES OF SYNTHETIC ECONOMIES: IMPLICATIONS FOR EXPERIMENTS, GAME DESIGN, MONETIZATION, AND REVENUE MAXIMIZATION A thesis submitted to the Kent State University Honors College in partial fulfillment of the requirements for General Honors by Christopher Wolf May, 2013 TABLE OF CONTENTS LIST OF FIGURES ........................................................................................................... iv LIST OF TABLES .............................................................................................................. v LIST OF EQUATIONS ..................................................................................................... vi ACKNOWLEDGEMENTS .............................................................................................. vii Chapter 1: Introduction to Synthetic Economics ................................................................ 1 Chapter 2: Framework and Existing Literature .................................................................. 3 2.1: Fundamental Framework ......................................................................................... 3 2.2: The Faucet-Drain Model ........................................................................................ 18 2.3: Synthetic Markets................................................................................................... 24 Chapter 3: Browser-Interface MMOGs and Case Histories ............................................. 30 3.1: Browser-Interface Classification ............................................................................ 31 3.2: The Faucet-Drain Model of Torn and Ruined City ................................................ 34 3.3: Gameplay and Economic Framework: Torn and Ruined City ............................... 36 3.4: Case: Hyperinflation in Ruined City ...................................................................... 50 3.5: Case: Inflation in Torn ........................................................................................... 51 3.6: Case: Attempted Correction ................................................................................... 60 Chapter 4: Implications for Experiments, Game Design, Monetization, and Revenue Maximization .................................................................................................................... 64 4.1: Implications for Experimentation .......................................................................... 64 4.2: Implications for Multiplayer Game Design ........................................................... 68 4.3: Implications for Monetization ................................................................................ 74 4.4: Implications for Revenue Maximization ................................................................ 77 4.5: Additional Case: Revenue Maximization Approach on Torn ................................ 80 Chapter 5: Findings, Conclusions, and Additional Points of Interest ............................... 91 5.1: Contribution to Existing Literature ........................................................................ 91 5.2: Potential Future Complications .............................................................................. 93 5.3: Additional Topics of Interest ................................................................................. 94 5.4: Final Remarks ........................................................................................................ 95 Works Cited ...................................................................................................................... 97 Appendix A: Interview with Black Market Participant on Torn ...................................... 98 iii LIST OF FIGURES Figure 2.1: WoW Shard Populations: Ranked by Total Avatar Population ..................... 10 Figure 2.2: Active Avatar Populations of select EVE-Online Shards .............................. 11 Figure 2.3: The Generalized Faucet-Drain Model of Synthetic Economies ..................... 19 Figure 2.4: First Model of Markets ................................................................................... 25 Figure 2.5: Synthetic Markets: Virtual World Supply Intervention ................................. 26 Figure 2.6: Synthetic Markets: Virtual World Demand Intervention ............................... 26 Figure 2.7: Second Model of Markets .............................................................................. 27 Figure 2.8: First Model of Price Inflation ......................................................................... 28 Figure 2.9: Second Model of Price Inflation .................................................................... 29 Figure 3.1: Partial Classification of Video Game Subsets ................................................ 32 Figure 3.2: Torn’s Faucet-Drain Mechanism.................................................................... 35 Figure 3.3: Monetary Base of Torn City Dollars .............................................................. 52 Figure 3.4: Shortage Increases due to Price Ceilings and Inflation .................................. 57 Figure 3.5: Price Effect of Raising the Point Market Price Ceiling.................................. 62 Figure 3.6: Price Effect of Raising the Point Market Price Ceiling on Donator Packs .... 62 Figure 4.1: Player Monetization Matrix ............................................................................ 78 Figure 4.2: General Revenue Curve with respect to Currency Exchange Rates .............. 80 Figure 4.3: Torn’s Linear Revenue Forecast .................................................................... 82 Figure 4.4: SAS Results for Torn’s Linear Revenue Forecast.......................................... 83 Figure 4.5: Torn’s Quadratic Revenue Forecast ............................................................... 84 Figure 4.6: SAS Results for Torn’s Quadratic Revenue Forecast .................................... 85 Figure 4.7: Revenue-Maximization Results ..................................................................... 87 Figure 4.8: VW Offer Price and Offers Accepted ............................................................ 88 Figure 4.9: Player-to-Player Prices in the Donator Pack Market...................................... 88 Figure 4.10: Updated Quadratic Revenue Forecast .......................................................... 89 Figure 4.11: SAS Results for Updated Quadratic Forecast .............................................. 89 iv LIST OF TABLES Table 2.1: Select Results of Castronova's Survey on Everquest Players ............................ 5 Table 3.1: Crime Difficulties and Rewards on Torn......................................................... 41 Table 3.2: Possible Merit Allocations on Torn ................................................................. 43 Table 3.3: Sample of Awards on Torn .............................................................................. 43 Table 3.4: Merit Allocation Options on Torn ................................................................... 44 Table 3.5: Characteristics of Medical Jobs on Torn ......................................................... 46 Table 3.6: Drug Selection and Effects on Torn ................................................................ 49 v LIST OF EQUATIONS Equation 2.1: Generalized Virtual Currency Exchange Rate Derivation ......................... 16 Equation 2.2: Example Exchange Rate Calculation ......................................................... 17 Equation 4.1: Calculation of the USD-TCD Exchange Rate ............................................ 81 vi ACKNOWLEDGEMENTS My thanks and appreciation goes out to my thesis defense committee, Dr. Leslie Heaphy, Dr. Victor Berardi, and Dr. Emmanuel Dechenaux, for their contribution to the quality of this thesis. Particular thanks to my advisor Dr. Lucas Engelhardt for his guidance, cooperation, and insight throughout the past two years; this thesis would not have been possible without him. Special thanks to Torn.com for allowing me access to a vast array of economic data with which to analyze and the wherewithal to implement significant changes to Torn’s synthetic economy. The scope of this thesis would have been limited without access to such extensive data. vii 1 Chapter 1: Introduction to Synthetic Economics Synthetic Economics is the study of human-to-human economic activity contained within the virtual worlds of multiplayer video games, and is an extremely young branch of economic study. The exploration of this subject has spanned barely 13 years; my objective is to expand the existing scope of Synthetic Economics by utilizing my eight years of experience playing multiplayer games, three years of developing browser-based multiplayer games, and one year of economic consulting with a prominent browser-based multiplayer game. The exploration of Synthetic Economics can be traced back to Zachary Simpson’s research which explored the economic structure of the popular online multiplayer video game Ultima Online. In addition to explaining the gameplay mechanics of Ultima Online, he briefly explored a variety of economic applications within the game (Simpson 1999). I will expand and adapt two of his contributions: one which describes how virtual goods and currencies flow through multiplayer games, and another regarding the negation of virtual good scarcity. The most prolific author of this field is Dr. Castronova, with no fewer than 13 works on the subject. He was the first