To what degree is RuneScape’s economy similar to the real-‐world
economy?
Student Name: Daniel Petoukhov
Session: May 2015
IB Subject of Essay: Economics Supervisor Name: Mr. Charles Hawkes
Student Name: Daniel Petoukhov
IB Student Number: Word Count: 3812
Abstract
This essay will be responding to the research question: “To what degree is RuneScape’s economy similar to the real-‐world economy?” It will be evaluating all of the immediately observable economic theories found in RuneScape, and will be comparing these theories to their real world counter-‐parts.
The essay will identify the basic economic needs of a player in RuneScape, and how the average player contributes to its virtual economy. By identifying these needs and contributions, the essay will have much more insight on how each economic theory works in this virtual world. By analyzing everything from scarcity to inflation and deflation, the essay will give an in-‐depth view of RuneScape’s economy. The goal is to determine the comparability of the two economic environments. This “virtual economy” gives us a chance to observe and to study an economy where nearly all factors can be controlled and a strong degree of comparability will suggest that virtual economies can be a strong competitor in today’s economic experimentation.
The essay has concluded that RuneScape’s economy has a strong degree of similarity to the real-‐ world economy, making it an important testing ground in new-‐school economics. Furthermore, features such as real money trade can give economists insight on the future of crypto-‐currencies, such as Bitcoin.
208 words
Table of Contents
Introduction ... 1
Gameplay ... 2
Skills and Levels ... 3
Combat ... 4
Basic Economic Needs of a RuneScape Player ... 5
How the Average Player Contributes to the Economy ... 6
Analysis ... 7
Resources (4 basic item groups) ... 8
Exchange Mechanisms ... 9
Scarcity ... 11
Supply and Demand ... 13
Elasticity ... 14
Inelasticity of Basic Item Demand ... 16
Elasticity of Valuable Item Demand ... 17
Demand Shocks ... 18
Price Controls ... 19
Inflation and Deflation ... 20
Real Money Trade ... 21
Evaluation and Conclusion ... 23
Works Cited ... 24
Introduction
Runescape is a massively multiplayer online role-‐playing game (MMORPG), released in 2001 by Jagex studios. As many MMORPG’s do, RuneScape boasts a virtual economy, and a very strong one at that. Much like in the real world, players are able to buy and sell items (goods) by using RuneScape’s main currency, the gold coin. As the border between the real and the virtual begins to fade in today’s world, economists are looking at virtual economies to serve as a point of reference to predict our economic future. By analyzing the extent to which a virtual economy, such as RuneScape’s, is similar to the real-‐world economy, economists will be able to deduce what areas of virtual economies are good points of reference for today’s virtual growth. Renowned economists and virtual analysts from Harvard University (Christopher Thorpe), Columbia University (Jessica Hammer) and the Helsinki Institute for Information Technology (Vili Lehdonvirta), to name a few, have realized the potential of these virtual economies in today’s studies of economics and are actively investigating what they can offer. In this essay I will be investigating the degree of similarity between RuneScape’s economy and the real-‐world economy by individually analyzing observable economic theories within RuneScape and evaluating how well they reflect their real-‐world counterparts.
RuneScape
Gameplay
Players begin by creating their own character and they are then thrown into an area where the game leads the player through a tutorial to learn some of the basics of Runescape.
“Players set their own goals and objectives as they play through the game” –Jagex Studios.
Players are able to train their skills, complete quests given by NPC’s (non-‐player characters) (with goods given as rewards for their completion) found within the world of Gielinor, fight various monsters and even other active players. Interaction between players is done through an in-‐game chat system, similar to a large online chat room, but messages only appear from those in a realistic proximity. From an economic standpoint, most goods in the game are tied into the killing of monsters and to the leveling of a player’s skills.
Skills and Levels
Skills are trainable abilities that a player can level as he progresses through the game. The game contains skills such as: strength, magic, agility, thieving and even skills like fishing, mining and cooking. Players get experience points when they perform an action that involves a certain skill. For example, making potions will give you experience points (XP) in the herblore (alchemy) skill. Once you get enough XP in a skill, that skill will level up. As the player’s level rises, they will have access to the creation of higher level items, but often times, this will also require more expensive materials. In this case, as the player levels up his herblore, he/she will have access to more powerful potions, but the ingredients for these will cost quite a bit more than some of the lower level potions. All skills begin at level 1 and are maxed out at level 99. This may sound like an easy task, but the XP needed to proceed to the next level scales with the current level. To put this into perspective, the amount of XP needed to get from level 98 to 99, is roughly the same amount as the XP needed to get from level 1 to 75. Getting a skill to level 99 is not an easy task and (depending on the skill at hand) can take multiple months to accomplish. Back in 2001, when Runescape was first released, the game contained a mere 7 skills. Today, the game contains 26 unique skills and new ones are constantly in development. With the introduction of each new skill, came the beginning of a new economic market as the leveling of most skills require certain crafting materials which can be conveniently purchased from other players who are willing and able to collect them.
Combat
Combat is a core concept in the world of RuneScape and it plays a crucial part in its economy. Each fightable character in the game, including your avatar, has a certain amount of “hit points” and a character can only take a certain amount of damage before their hit points are reduced to zero, once this happens, the character dies (this is not permanent for players). Players are able to fight monsters found throughout the world using swords, axes, bows and magic, and each monster will drop items (goods) upon death (when their hit points reach 0). Every monster in the game has certain “drops” assigned to them which all have a percentage chance of dropping after death (those with lower percentage changes will naturally be more expensive). These range from bones (used to level up the prayer skill), to gold coins (currency), to armor, weapons and other useful items. Higher level monsters, which can only be killed by higher level players, are more likely to drop more valuable items, meaning that as you progress through the game, your economic contribution will increase (much like the transition from childhood to adulthood). To a large extent, fightable monsters can be seen as one of RuneScape’s most important natural resource. Combat also has a set of skills that are tied into it: Attack (accuracy), Strength (damage per hit), Defense (damage mitigation) and Constitution (amount of hit points) and players gain experience in these by fighting, thus raising their “combat level”. A higher combat level allows players to fight higher-‐level monsters, which in turn gives them the chance to collect better drops. Much like in a capitalist environment, this gives incentive for new players to progress through the game.
Basic Economic Needs of a RuneScape Player
Much like in the real-‐world, the average RuneScape player has certain needs in order to “survive” in the world RuneScape. “Surviving” is a risky term to use when it comes to describing virtual life in an MMORPG as a RuneScape character will never be subject to natural real life occurrences, such as starvation, disease or old-‐age. To thrive in Gielinor (RuneScape’s virtual world), a RuneScape character needs a few things: weapons and armor, food/potions (to restore health points in battle), and crafting instruments/tools/materials to learn a certain craft(s) or skill(s) (i.e. farming, cooking, magic, mining, thieving, etc.) These can be considered as the three building blocks of RuneScape’s economy. All crafting materials can be extracted from the world by any player and buying crafting materials is done simply to speed up the process of leveling up a skill, such as buying wooden planks to level up a character’s construction rather than cutting and refining your own wood. In some cases, buying materials is necessary, for example, if a player wants to refine oak wood into planks, but does not have the woodcutting skill necessary to chop down oak trees, he or she will have to buy oak logs from a player who has a high enough woodcutting level. Cosmetic wear also plays a large role in RuneScape’s economy and it ranges anywhere from heavy ornate armor to colorful party hats. These goods generally have no use other than to represent achievements, wealth or for personal aesthetic appeal. Nonetheless some of these items are extremely expensive and popular, especially among wealthier and more experienced players.
How the Average Player Contributes to the Virtual Economy
At the beginning of his travels, a new player will earn most of his wealth from quest rewards and the meager drops of low-‐level monsters. The average player is likely to invest this money solely into weapons and armor, crafting tools/materials and food/potions. Like a person with a low income, a low-‐ level player has little significance in the economy, even when a large sample-‐set is observed. The difference in RunseScape’s virtual economy is that anyone can get out of the low wealth brackets simply by playing the game and investing their time.
While progressing through the game, players will find many resources from which to collect crafting materials that are used to level up skills. These items can be collected and either used for personal skill leveling or sold at a profit. This represents an extremely large part of the economy. Many players will kill certain monsters (for specific drops) or collect certain materials monotonously in order to make profits. This is a very common “job” in RuneScape and at high levels, players will kill bosses (extremely strong monsters) to try to get expensive drops or will use their high level skills to collect high level materials, such as mining runite ore, which requires an impressive level of 85 in the mining skill. Skills, such as mining, are usually a safe and dependable source of profit for players, which is why having high level skills is a valuable asset. This can be easily compared to qualifications in real life, where better qualifications suggest better incomes, and thus better quality of life.
Analysis
RuneScape’s economy holds many similarities to the real-‐world economy, but also has its fair share of differences, most of them stemming from the limited amounts of time that gamers can invest into the game. There are certain economic theories that are easily observable and comparable in both environments:
A. Resources (4 basic item groups)
B. Exchange Mechanisms (grand exchange and trading) C. Scarcity
D. Demand and Supply E. Elasticity
F. Demand Shock G. Price Controls
H. Inflation and Deflation I. Real Money Trade
Resources (4 basic item groups)
In the real world there are basic economic pillars that are made up of human necessities, such as food and water, and economic foundations, such as oil. In RuneScape there are four main categories of items: consumables, primary products, finished items and discontinued items. Consumables are anything that has a limited amount of uses attached to it, such as food or potions. Much like in the real world, primary products, or crafting materials, are items that allow for the creation of another item via a skill. For example, ores, which can be smelted into metal bars for further usage. Finished items are the final product, armor, weapons, furniture and even consumables generally fall into this category, and these can be compared to cars, clothing or housing. Discontinued items are items that are no longer obtainable by playing the game and can only be bought from players who collected them whilst they were still available. This means that there is a set number of these items in the game, usually making them extremely expensive and sought after, much like famous pieces of art. These four categories of items are the driving forces behind RuneScape’s vast economy and virtually all of the observable economic theories within the game focus on at least one of these groups.
Exchange Mechanisms
There are two ways to exchange items between players in RuneScape. One is to use the simple trading system within RuneScape where player are able to trade directly between each other. The players have complete control over what they want to give to the other person and what they want to receive in return.
Trading Window in RuneScape
Currently, the much more popular method is to use the Grand Exchange, which was only released in late 2007 (before this the only way to exchange items was to use RuneScape’s trading system).
Grand Exchange Window in Runescape
Similar to the stock market, The Grand Exchange (GE) is a large scale trading system where buyers and sellers do not have to meet each other in order to buy and sell goods. In the GE, bartering is not supported and the only way to conduct trades is by using the in-‐game currency, gold pieces (GP). Once an item is bought or sold, the buyer or seller can collect their item/money right there at the GE. The GE greatly stimulated RuneScape’s economy and turned it into a true powerhouse.
Scarcity
Scarcity is one of the most elementary economic concepts, but is still the center of basic economic debate. In real-‐world economics, scarcity can be defined as: “The basic economic problem that arises because people have unlimited wants but resources are limited.1” In RuneScape, scarcity
functions rather differently. Since RuneScape is a virtual world composed of virtual resources and virtual wants and needs, there is an infinite supply of resources when an infinite amount of time to gather them is considered. So what makes a scarce resource scarce? Well, for most people, this would be the amount of time it takes to gather a certain resource. The longer it takes, the scarcer the resource because there will always be less of it on the market as players simply do not have the time to play the game continuously and resources can only be collected within the time frame that a player chooses to play the game.
So now that we have determined that there is no such thing as a scarce resource (in terms of the conventional definition), we can define a different type of scarcity that is unique to virtual economics: “time-‐restricted resources”. Since all resources and commodities come in infinite amounts in RuneScape, all of them can be defined as “time-‐restricted resources”, some more than others. A heavily time-‐restricted resource would be one that could take hours of gameplay in order to obtain, while a lightly time-‐restricted resource, such as a carrot growing on the side of a dirt road, would take mere seconds out of a player’s game time to collect. This usage of time-‐restricted resources is how videogame developers implement a notion of scarcity into their virtual economies.
When looking at RuneScape specifically, one can argue that “discontinued items” directly represent “scarcity” in the conventional form. These items, such as a Santa hat that was only obtainable on Christmas day of the year 2002, are now extremely rare and expensive, owned only by players of
extreme wealth or those who obtained it whilst the item was still available. While these items are limited, they are not being depleted as they are no longer being collected.
Supply and Demand
Another very basic concept in economics is the idea of supply and demand. “Demand is the amount of a product people are willing to buy at a certain price. The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people demand that good. Supply demonstrates the quantities that will be sold at a certain price. Unlike the law of demand, the law of supply suggests that the higher the price, the higher the quantity supplied. When supply and demand are equal (e.g. where the graphical representation of supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient state because the amount of goods being supplied is exactly the same as the amount of goods being demanded.2”
Supply and demand in RuneScape function very similarly to the supply and demand in the real world economy. Inelasticity of basic item demand, elasticity of valuable item demand and even demand shocks are all observable phenomena within the virtual world of RuneScape.
Elasticity
Elasticity in RuneScape is very similar to real-‐world economies. “In economics, elasticity refers the degree to which individuals (consumers/producers) change their demand/amount supplied in response to price or income changes”3. This can be calculated as:
The elasticity of a good or service is largely dependent on the amount of compliments and/or substitutes that it has.
A complement is “A good or service that is used in conjunction with another good or service”4.
This means that the demand for a good or service will rise if the price of its complementary good falls and vice-‐versa. For example, if the price of printers increases, the demand for ink cartridges will decrease because these two goods complement each other. If the price of one-‐handed weapons decreases, the demand for shields will increase as these are commonly used together in combat, thus they complement each other.
On the other hand, a substitute is “A product or service that satisfies the need of a consumer that another product or service fulfills”5. Therefore, when the price of a good or service increases
(meaning demand goes down), the demand for its cheaper alternative, or substitute, is going to go up. In terms of RuneScape’s economy, this effect can be seen in every basic item group. When looking at consumables, if the prices for cooked lobsters increase, than the demand for other similar foods will increase because they nearly identically fulfill the needs of the consumer.
3 http://www.investopedia.com/terms/e/elasticity.asp
4 http://www.investopedia.com/terms/c/complement.asp
There is a phenomenon that occurs with discontinued items which renders supply perfectly unresponsive to any price changes. As previously discussed, discontinued items are items that are no longer obtainable in the game, thus there is a set number of them in the game. This means that players do not have the option to supply more or less, regardless of how much may be demanded.
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We can see that on the graph, the quantity supplied stays the same no matter what the price is, although generally these items will be extremely expensive.
Inelasticity of basic item demand
“Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases.7” There are certain items in RuneScape that are
constantly in high demand. These will be referred to as “basic necessities”. These basic necessities fulfill
very basic needs that players of all levels and experience can use. Because of the extreme demand for these items, a change in price has no significant effect on their demand. In real life, a most basic but accurate reflection of this would be water, since it is such a basic necessity, it is very insensitive to price changes. In RuneScape, goods such as weapons (as a group of items), or any other previously discussed basic RuneScape necessity, are also very insensitive to price changes, as they are vital for combat.
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7 http://www.investopedia.com/university/economics/economics4.asp 8 http://www.uri.edu/artsci/newecn/Classes/Art/INT1/Eco/S_D/Gifs/demand.inelastic.gif
Elasticity of Valuable Item Demand
On the other side of the spectrum, there are certain items which scale with level. For example, when you create your character all of your skills are at level 1. At level 1 “mining” you may only wield a bronze pickaxe, but as you progress you unlock the ability to wield pickaxes that are forged out of more reliable metals such as iron, steel or the staple fantasy metals like mithril and runite. This means that even if a lower level player was able to afford a high tier pickaxe (or any other skill dependent item for that matter) he/she would not be able to use it without the proper skill level. Because of this, the elasticity of an item in RuneScape is based off three core concepts: the item’s level demand, the availability of compliments and substitutes and the specific player’s wealth. Much like in real life, as players progress through the game and gain levels in different skills, their wealth is also going to naturally increase. This means that higher level items are less elastic simply because the players who get the most utility out of them (players of higher level) will naturally be wealthier.
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Demand Shocks
In economics, a demand shock can be described as an: “event that temporarily increases or decreases demand for goods or services.”10 Causes of demand shocks can range from a tax change all
the way to a natural disaster. If a country suffers an earthquake there will be a positive demand shock for water and medical supplies.
An addition of a new quest or skill that requires a specific item(s) can cause severe demand shocks within the RuneScape economy. For example, raw chicken used to be one of the least demanded food items in the game. In 2008, the “summoning” skill was added into the game and raw chicken an important crafting material. The demand for raw chicken exploded as players began leveling the skill and suppliers realized the profit potential of collecting and selling it in bulk. Just like in the real world, this was temporary, and the price of raw chicken has since stabilized, but these types of demand shocks are
a common occurrence.
10 http://www.investopedia.com/terms/d/demandshock.asp
Price Controls
Price controls are “Government mandated minimum or maximum prices that can be charged for specified goods”11. Governments tend to implement price controls only when necessary, such as setting price ceilings on food if the prices become too high. In the case of RuneScape, the government is Jagex, the developers of the game. In most cases, price ceilings are put on items that are necessary for progression, such as low and mid-‐level armor. This is again comparable to price ceilings that are put on basic necessities in real life.
Inflation and Deflation
“Inflation refers to a general increase in the price of goods and services”12 while deflation is a “general decline in prices often caused by a reduction in the supply of money or credit”13. Inflation is a permanent factor in RuneScape as inflationary pressure will exist as long as the game does. While the game is playable, players will keep amassing wealth as there is no set limit to the money supply, which means that most items in the game will experience a gradual increase in price for as long as the game exists. Deflation is not a common factor in RuneScape’s virtual economy as there will never be a reduction in the supply of money. Deflation can occur after a demand shock, but after the prices re-‐ stabilize, they will continue to inflate.
12 http://www.investopedia.com/exam-‐guide/cfp/economics-‐time-‐value/cfp6.asp 13 http://www.investopedia.com/exam-‐guide/cfp/economics-‐time-‐value/cfp6.asp
Real Money Trade
Real money trade (RMT) is the sale of virtual in-‐game currency, items or high-‐level characters for real money, it is also known as a virtual economy’s “secondary market”. This has always been a big part of MMORPG’s and is where a virtual economy branches into the real economy. RMT activity generally consists of “gold-‐farmers” and “power-‐levelers”, both of which are players offering services where they essentially invest time into the game on someone else’s behalf. Players consistently show the will to purchase these services as to not spend the time and effort themselves. To understand the scope of this industry, we can first look at how much the global online game market is worth.
The global online game market was forecasted to be worth over $21 billion in 2012 and according to Digi-‐Capital, will be worth 48 billion by 2016.14
In 2009, the secondary market for online games was worth over $3 billion dollars and employed nearly 400,000 people, numbers that have surely risen over the years. These statistics truly show the grand scale of this hidden market and its rising importance in today’s virtual world.
The purchase of in-‐game currency from “gold-‐farmers” is extremely similar to the idea behind crypto-‐currencies, like Bitcoin. By spending real money, people are able to buy virtual currencies. Although Bitcoin is an officially recognized currency, which can be used to buy many physical items, it works very similarly to the purchases of virtual in-‐game money. Thus RMT and “gold-‐farming” can play an important role in the economic studies and predictions for crypto-‐currencies.
