The Faded Mirror

I’ve been mulling the latest Solution to the Energy Crisis over in my mind ever since I first heard about it a few weeks ago.  Texan oil billionaire T. Boone Pickens has been criss-crossing the country shilling for his new program to remake America’s energy infrastructure and eliminate dependence on foreign oil. 

The Pickens’ Plan itself is rather simple, which translates to feasible, unlike other wacky ideas.  It doesn’t rely on biofuels, which are economically troubling and possibly a net energy loser.  Nor does it count on pie-in-the-sky “alternative energy” technology, which simply does not exist.  No, it’s actually a rather clever shifting of resources that might actually work.

To put it simply, Mr Pickens wants to build a zillion windmills in South Central United States to generate electricity.  This extra electrical generation capacity will be used to replace power from natural gas fired generators, which will be scaled back.  The extra natural gas will be used to fuel cars and trucks, thus reducing the amount of oil the US needs to consume.  The balance of America’s oil needs then would be met with the domestic supply.

It sounds reasonable, on the face of it.  The workability of the plan breaks down to three major questions:  Can wind powered generators replace natural gas fired generators?  And, can natural gas replace gasoline as the major fuel source for automobiles?  Lastly, is the amount of gasoline saved enough to eliminate foreign imports?  This is quite a lot to chew on, so I think I’ll breakit down to a series of posts.  If there’s enough interest, I might even get to taking a look at the third question someday….

Some have given me a bit of grief for the depressing tone of some of my posts.  Hey, I can’t help it — economics is the Dismal Science.  So, I thought I would write about something a bit more upbeat: computer games.

One of the problems with economics is that it’s not easy to construct experiements.  A living population is very complex, and it is difficult to impossible to impose artificial constraints upon it in order to test the mechanisms of interest.  Naturally, one cannot just take over an entire city and restrict the flow of goods in and out to test laws of supply and demand.  Even in cases when this does occur, human ingenuity tends to foster trade when none should be possible.  And, when one is able to create a completely artificial and controlled setting in a laboratory, other factors, such as how cute the guys think the female participants are, can easily skew the results.

However, onto this scene bursts the MMOG, or Massively Multiplayer Online Game.  For the two or three of you not in the know, a MMOG is a computer game which runs on a central server, to which hundreds or even thousands of players connect via the Internet.  This allows them to interact with each other as they play the game, cooperating or competing as they see fit.

Because almost all games have some sort of medium of exchange, trade is possible between players.  Thus, a virtual economy emerges, which can be controlled and measured much more tightly than a real-world economy.  Furthermore, nobody will starve if conditions get extreme….

Given environments that are highly conducive to in-depth study, many economists are turning their attention to the economic realities of MMOGs.  In return, the company that runs EVE, one of the biggest MMOs, went and hired their own economist to help them understand the virtual economics of their own creation.  With the large number of players that can interact in myriad of ways, MMO economics can get quite complex indeed.

I recently came across a conversation about what I consider one of the most fascinating parts of one of my family’s favorite games: Puzzle Pirates.  In Puzzle Pirates, players assume the persona of a cartoon pirate, who proceeds to compete against other pirates for fame, power, and pieces of eight.  With enough pieces of eight, or poe, the player can buy all sorts of piratey goodness to outfit his virtual buccaneer, from fancy clothes to Grand Frigates.  The neat part is that all the goods for sale are manufactured by other player pirates, who start businesses, recruit workers, pay taxes, and manage inventory.  The entire economy is player-driven.  I’ve stopped reminding my son what a great education in economics he is getting by running his own cannonball factory — he’s having too much fun.

But what’s even more fascinating to me is the company’s revenue model.  After all, server hardware and bandwidth is not free, and believe me, programmers expect to get paid.  So, they offer the players two choices.  The first is to pay a set fee to the company every month in exchange for unlimited access to all the gameplay.  This has worked well.  But, it is overshadowed by the other option: Doubloon Oceans.

In a Doubloon Ocean, anyone can play as long as he likes for free.  Yes, the game company does not charge people money to play.  However, certain aspects of the game charge the player Doubloons.  For example, to get access to the game tables in a saloon, one has to buy a pass for 5 Doubloons, which grants access for a month.   To buy anything besides the most basic of swords, the player has to pay a few thousand poe and three Doubloons.  To go on a Sea Monster Hunt, one needs a Sea Monster Hunting License which, as you guessed, costs a few Doubloons.

Now, where does one get these Doubloons?  Well, you can buy them directly from the company for about 25 cents each.  However, in their infinite genius, the company also lets players buy and sell Doubloons on an open auction for poe, the in-game currency.  “What?” you ask.  “They just circumvented their whole payment scheme.  How is that going to make them money?”  The answer is: “Very easily.”

They are shrewdly taking advantage of the economic principle that the same item can be worth different amounts to different people.  Most companies just pick a single price to sell an item that maximizes the amount of money people are willing to pay versus the number of people willing to pay it.  For example, if you are selling lemonade, two hundred people might be willing to buy a glass if you sell them for one penny each, but at the end of the day, you only pocket a dollar.  Two people might be willing to pay a dollar each for your lemonade, but you are still better off charging twenty-five cents, if there are ten people willing to pay at that price. 

It would still be nice, though, to convince the two big spenders to fork over the big bucks, though.  Amazon.com tried to implement a differential pricing scheme once, but it blew up in their faces.  People don’t like being fleeced.  So, companies try to find as many ways as they can to convince people to pay a lot more for a product that is essentially the same as a lower priced version.  Why do you think there are so many brands of Ford cars?

But with Doubloons, I think Puzzle Pirates has hit on a magic formula.  Most players are content to pay as little as possible (i.e. nothing) for reduced gameplay.  Some will pay a small amount from time to time for special bonuses.  But there are a few that are gung-ho about the game and are willing to shell out big bucks to experience all that the game has to offer.  I think that these deep pocket pirates are the main source of income for the company.

One of the main complaints about such a system is that allowing people to purchase gameplay or advantages effectively unbalances the game, and thus is inherently unfair.  I think that this argument falls apart on two points.  First of all, the Doubloons (and hence the advantages) are available to everyone at the same relatively affordable price, so it’s more a matter of marginal utility.  But more importantly, in games of this sort, advantages are only beneficial if someone has the requisite amount of skill to use them.  I could buy myself a Captainship (I think the price was around $20), but if I don’t know how to effectively command a ship, I won’t last long on the open sea.

So, some of the big spenders may be dilettantes, but most of them are actual enthusiasts with skill at the game.  These people become the natural leaders, and they are willing to put the time and money to lead effectively, founding crews and outfitting ships.  There are those who don’t want to sink so much into the game, and they tend to be ranking officers.  Then, there are those who have skill at the game, but are unwilling to invest much money in it.  To be enjoyable for all, the game needs skilled players.  So how does it encourage skilled players to play, even though they don’t want to pay?

The answer is the Doubloon auction.  There is a well-designed currency exchange in the game that sets a market price for Doubloons in terms of poe, the in-game currency.  Players that are unwilling to spend their own money on Doubloons exchange their poe (the in-game currency) for Doubloons, presumably bought by the big spenders.  In essence, the players earn poe through their skill, then trade it for privileges to the big spenders, who use it to fund their own activities.  So basically, the players are working for the big spenders — the benefits of their labor goes to the spenders, who rewards them with consumer goods.  It’s a bona fide consumer economy with market-based labor prices.  There also seems to be a touch of inflation, as more pirates (workers) come into the mix, just as one would expect.

I’m only scratching the surface here on the economic marvel that is Puzzle Pirates.  If you are interested, take a look.  And if you happen to run into Padre on the Sage Ocean, give him a hearty “‘Hoy!”

By popular demand (i.e. my wife), I am now trying to add more images into my posts.  I am by no means anything resembling a graphics artist, so I will do my best to make the images both relevant and not distracting.  This is my first go at it.  Let me know what you think!