The Economics of Pretend Pirates

August 4, 2008 at 8:56 pm | Posted in Economics, Technology | 12 Comments

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!

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12 Comments »

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  1. Thanks for the praise! You are correct in most of your assumptions. If you’re interested in digging in deeper to the PP economy, we would be interested in sharing some data!

    The graphics are great, btw. I was sure I was looking at icons lifted from the website (which is fine, too).

    - Daniel at threerings.net

  2. Thanks muchly for the kind words!

    For those not in the know, Daniel James above is AKA “Captain Cleaver“, CEO of Three Rings, which is the aforementioned company that developed Puzzle Pirates.

    I have no idea how he found my blog. Probably because I stole the graphics from his site.

  3. Now Hypnos has linked here in her blog, I suspect you’ll be getting a lot more readers.

    Much like the EVE players, I and many other YPPirates would be very interested if you or another economist did some analysis of the YPP economy, so I encourage you to take up Cleaver’s offer. :)

  4. Yikes — I am strictly an armchair economist. I took one intro microeconomics class in college to fulfill a requirement for my engineering degree way back when, and I’ve been hooked ever since, though woefully undereducated. Most of what I know I have learned from this guy.

    But, thanks for the vote of confidence! I hope to delve into the murky waters that are the Puzzle Pirate economy and see what comes to light!

  5. You missed a key element of the dubloons. If a pirate buys dubloons online, then their pirate will not be deleted due to inactivity. I bought dubloons only once, purely for this reason. The rest of the time, I have just earned all of the money I needed in game. Surprisingly, there is a large community of adults that play the game. I even know one woman in her 60s. I think you need to create your own account. ;)

  6. I didn’t know that about inactivity, although it seems easier just to log in and wander around for a bit.

    Don’t worry — I have my own account, with a Pirate on a Doubloon ocean. In fact, I once bought Doubloons and handed them out in-game to my sons as Christmas presents. Otherwise, I’ve earned all the Doubloons I’ve needed. Shipwrightery and Atlantis are my friends…. :D

  7. There is something akin to a banking system going on here. The game organisers are acting as the central bank. The number of doubloons they allow to circulate will determine the rate of inflation you refer to. The big spenders who auction their doubloons are acting like commercial banks providing funding to the economy in addition to their role as pseudo employers.

    Talking of experiments, an interesting demonstration of the current ‘credit crunch’ would be to restrict the number of doubloons the big spenders were allowed to auction. What would that do to cannonball sales?

  8. Cannonball sales with restricted sales of dubloons eh? I’m not sure what would happen. It could drop, or it could stay the same. After all, the cannonballs do not require dubloons to be produced, or bought and sold. It’d probably drop however, due to demand (read further). It might affect bulk sales. I know a few major dubloon buyers who can buy out several islands’ stock of balls, and have done it.
    However, it can and almost certainly will affect the ships that uses the cannonballs. Ships require a lot of dubloons to be delivered into your hands. Less dubloons mean less ships being sold. Less ships being sold means less cannonballs being shot. Less cannonballs being shot means a higher supply over demand.

  9. I am quite interested in this topic as well, in reality I think playing this game a bit in my free time as an architecture major was a perpetuating factor in my switch to an economics major.

    In any case I’ve recently started researching within the ship product markets and trying to find equilibriums within them, and so far it looks as if most players are quite risk averse when it comes to cannonballs and when the math is done it would seem the room in the market is quite large (though these are very preliminary results).

    Anyhow maybe it’s the state of the economy and my lack of a job but it seems interesting for the moment.

  10. Interesting article, altough really basic.

    You are right, the doublon exchange is working right, but I really think it’s a thing that can slipped off Three Rings hands at any moment. Right now, noone has done it yet, but it is very easy to cause a massive inflation in the doublon price, causing the players not buying dubs to make the game imposible to advance.

    It is very cheap to create an inflation in a new ocean, much more difficult and expensive in a well developed ocean, but it is posible. You remember about the petrol barrel going upper than 100$? It only needed 1 man to get there. Well, this is the same case. I wonder if Three Rings has had that in mind, and if they already have a plan in case this some day happens.

    • I doubt there is too much danger of inflation from manipulation of the in-game currency exchange.
      For one thing, with thousands of players trading Doubloons (real money) and Pieces of Eight (play money) constantly the market is quite large. Second, it is not possible to corner the market on POE in the game, there is always an in-game supply available to other pirates from pillaging non-player ships. Third, even if you devised some clever scheme to manipulate Doubloon prices, it would likely involve buying a large chunk of Doubloons to make it work (and I doubt Three Rings would mind.)
      And, finally, well… it’s a game. If someone wants to be a pretend currency market manipulator ( and is willing to pay for the privilege ) I don’t really see how that is a big problem for my pretend gem smuggling career.

  11. I find this stuff fascinating, too. And not just for the doubloon oceans. I’m also interested in how the economies are managed on the subscriber oceans where it all started, and how do the two differ. I am really interested in how the knowledge we should be gleaning from the operation of YPP’s game economies can inform the debate about the current national debt and real world economies like that of the US dollar.


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