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Designing Virtual Markets for Fun and Profit - GDC 2013

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Lecture given at the Game Developers Conference, San Francisco, 27 March 2013. Hit play to hear the audio! Some bonus slides not shown during the lecture are at the end. …

Lecture given at the Game Developers Conference, San Francisco, 27 March 2013. Hit play to hear the audio! Some bonus slides not shown during the lecture are at the end.

Abstract: Today's games are full of different kinds of markets for buying and selling virtual goods and currencies, such as item shops, auction houses, NPC vendors, and real-money marketplaces. Some markets are player-to-player, some are publisher-to-player, and some involve even more parties. Some markets are fun to use, some are quick and efficient, and some generate social interaction. Based on economic theory, consulting experience, and real examples, this lecture shows you how to approach this complex space in a structured manner in order to design great markets that support your gameplay or monetization goals.

About the speaker: Dr Vili Lehdonvirta is one of the world's leading scholars dealing with virtual goods and currencies. He is a visiting fellow at the London School of Economics, an adjunct professor at the University of Turku, and the principal author of the World Bank report on virtual economies. He has advised leading interactive entertainment companies including Rovio (Angry Birds), Sulake (Habbo), CCP Games (EVE Online), Digital Chocolate, Gameforge, and Live Gamer. He has lectured at the Game Developers Conference, Game Developers Conference China, Online and Social Games Summit, Virtual Goods Summit, and numerous other industry events. Before his academic career, Lehdonvirta worked as a game developer, creating some of the web's first real-time multiplayer games with a micropayment revenue model. His book on virtual economy design (with Edward Castronova) will be published by MIT Press.

http://schedule2013.gdconf.com/session-id/822302

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  • World of Warcraft’s designers have enabled trading for common items, but made it impossible to trade many of the rarer ones between players. Why is this?In the case common items, the positives of player-to-player trade probably outweigh the negatives. Trading is fun, players can specialize in producing those items that they like producing and buy the rest from other players. Loss of signal value is not a concern: common items are easy to obtain, so they carry little status or information value anyway.In the case of rarer items that are more difficult to obtain and therefore carry significant signal value, the negatives probably outweigh the positives. The quest to obtain a certain prestigious set of rare items is the main reason that keeps many people playing the game. If these items could be easily purchased from a market, many players would reach their goals sooner and the goals would not feel as worthwhile in the first place.Thus the two-tier solution.To account for this apparent inconsistency in the game’s physics, the designers have come up with a story device, “souldbinding”, that provides an explanation for why some items cannot be transferred while others can.
  • most markets in games are monopoly markets where the publisher sells items to the playerin a monopoly, the publisher gets to price each item exactly how they want togreat for creating a highly predictable economy and game experienceyou can optimize every price perfectly to ensure that at each point of time in the game, the player can afford exactly what they should affordand that there’s always something just out of reach that tempting them to move forwardmonopsony is the buyer’s equivalent of a monopoly: players create things and sell them to the publisher or NPCs that represent the publisher. This is obviously also very typical in games.
  • the unregulated market represents a completely different approach: you let players create things and sell them to other playersthis kind of a market is more difficult to set up and use, and doesn’t appeal to everyonebut those who do participate in it may feel that it’s more meaningful to do so, because the items they produce are used by real peoplecompare to the monopoly, the unregulated market results in dynamic prices that change over time, making the game experience less predictablethis dynamism can give rise to new opportunities for players: players try to anticipate market movements, make use of arbitrage opportunities between different geographic markets and time zones, and even corner the market to establish a temporary monopoly
  • a player-to-player market doesn’t have to look like a spreadsheet – it can look like this, from MapleStoryso what’s happening here is that players are gathering in a known spot to hawk their wares to other players – it’s a virtual bazaarin terms of market structure, this and EVE Online’s spreadsheet-like markets are both exactly the same kind of unregulated markets
  • so I mentioned that in unregulated markets, prices are unpredictable, and this creates fun dynamism
  • But sometimes the dynamism is not so fun.The fact is that dynamic market prices can sometimes break your other game systems, like crafting, which relies on a steady supply of affordable raw materials.You can address this issue with the price ceiling market structure.
  • The price ceiling structure means that you introduce an NPC to the market who is willing to sell unlimited quantities of the good at a fixed price, which we’ll call P1.As long as the unregulated market price is under P1, this has no impact on the market. But if the unregulated market price threatens to rise above P1, then the buyers will switch to the NCP supplier.This means that P1 effectively becomes the ceiling price above which the market will not move.
  • Ok, now the price for our materials – let’s call them dragon scales – starts falling. It seems there are too many dragon hunters supplying this good.In an unregulated market, the invisible hand would fix the situation – some dragon hunters would change their profession to some other activity that’s currently undersubscribed, and the economy is balanced.In a game economy, though, you have to think twice about this.If a player has joined the game with the intention of playing a dragon hunter, has named their character Thorin the dragon hunter, and bought all the premium dragon hunter gear, the last thing they want to be told is that the dragon hunting industry is currently in recession, and that they should consider switching to baking or healing instead, as there are more openings there.Many people play games to escape this kind of lack of control over their lives, not to experience downscaling and restructuring all over again.
  • So what you can do in terms of market structures is to introduce a price floor, an NPC that will always buy any quantity of dragon scales at a fixed price P2, to guarantee hunters a fair reward.
  • Price ceiling and price floor together establish a price window within which the market price can fluctuate.The next thing you need to do is tweak your faucets and sinks to keep the price moving within that window to prevent the market from devolving into a simple monopoly or monopsony. But that’s a topic for another talk.
  • The unregulated market, where players sell goods to other players, can be a very enjoyable market structure in games. It is used a lot in MMO games like EVE Online. However, unless unregulated markets are very carefully managed, they can find themselves in equilibria that break the game experience for many players. Prices of dragon scales may fall too low to sustain players playing the role of dragon slayers, for example.The monopsony structure, in which the publisher buys from users, addresses the above problem. In this structure, the publisher, usually through NPC merchants, buys all the dragon scales from players at a fixed price. Other players are not involved as buyers. By guaranteeing a certain price no matter how much is produced, the publisher effectively eliminates the producers’ risk and downside. However, this structure also eliminates the potential upside and general excitement of player-to-player trade.The price floor structure represents a compromise between exciting but volatile free market prices and reliable but dull monopsony prices. In this structure, the publisher does not completely exclude user-buyers from the market, but acts as an additional buyer alongside them, usually in the form of NPC merchants. The NPCs will always offer a certain minimum price for any good, so that at times when other players are not willing to pay almost anything at all for dragon scales, the suppliers are nevertheless guaranteed a floor price. This floor price is in effect a subsidy, similar to agricultural subsidies in Western countries. Thanks to the subsidy, dragon hunters (and Western farmers) can enjoy the upsides of the market whilst not having to react to the downsides.If the lack of demand (or excess production) on the market is chronic, then the price floor structure devolves into a near-monopsony. In such a situation, the price floor structure provides few if any benefits of user-to-user trade. Subsidies also raise the question of who pays for them. In a virtual economy, the money used to pay for subsidies can be created out of thin air. But this additional source of money flowing into the economy needs to be offset with a corresponding sink, or otherwise it can cause inflation. Inflation is a subtle tax on everyone who owns money, so even virtual subsidies are not free.So far we’ve talked about market structures from the perspective of players who want to sell goods. Now let’s examine market structures from the buyers’ perspective. For players who want to buy goods, an unregulated player-to-player market is attractive for similar reasons as it is to the sellers. It can be fun to buy items from other players and occasionally haggle over prices. Free, fluctuating markets also make it possible to find lucky bargains. This also encourages players to log in often. On the negative side, large price fluctuations can result in unexpected ramifications for other parts of the buyers’ game experience. For example, in World of Warcraft, some crafting materials occasionally become so expensive as to present problems for players who need them in their daily use of crafting skills. Chronically high materials prices can make crafting professions unplayable.In the monopoly structure, the publisher (or NPCs) is the only seller and gets to dictate prices. It addresses the problems created by unregulated prices, but it also lacks the excitement of user-to-user trade. The price floor structure, where the publisher acts as a seller alongside user-sellers, is a compromise between an unregulated market and a monopoly. The publisher’s offer price effectively creates a “price ceiling” on the market, as no buyer will need to pay more for the good than what the publisher is asking for it. User-sellers can still carry on business provided that they can beat the publisher’s prices. This way, a lack of affordable materials will not become a bottleneck for crafters. But as the publisher creates the goods it sells out of thin air, care must be taken not to flood the economy with too many goods.A market structure that simultaneously involves both a price floor and a price ceiling is called a price window. User-to-user trade will only take place at prices that fall within the window. Otherwise players trade with the publisher. The smaller the window, the more predictable the market is, but the less room there is for user-to-user exchanges. Choosing the right market structures and publisher prices to support the user experience involves striking a balance between too much regulation (boring) and too much freedom (undependable).The correct choice of market structure depends also in part on such factors as the target player demographic. Traditional MMO players are relatively dedicated gamers and can handle the occasional setback, especially if a corresponding upside is also possible. Thus MMOs usually feature relatively unregulated user-to-user markets. In comparison, many mobile and social game developers cater to a much more mainstream audience that is more used to single-player casual games and non-interactive entertainment. Not surprisingly, then, the developers of so-called social games tend to go for the most asocial market structures, namely monopoly and monopsony, instead of structures that facilitate player-to-player engagement. Everything from strawberry bushes to restaurant chairs is sold at fixed prices from the publisher’s catalogue. This allows designers to provide a game experience that is more consistent and predictable, if also less satisfying to some players.
  • When a publisher uses virtual goods or currency sales as a way to turn its content into earnings, the question is not only what market structure provides a good user experience, but also what market structure yields the biggest revenues from a given set of content. From this perspective, an obvious choice is the monopoly structure, which is used in most social games. In this structure, the publisher sells currency or items designated as “cash items” to the users, and will not permit the users to re-sell them to other users, in order to prevent competition from second-hand sales. After all, virtual second-hand goods are identical to new ones. If second-hand sales were permitted, a part of the users would buy used instead of new, and the publisher’s sales would fall – right?Amazon.com, the world’s biggest bookstore, is so popular that many people don’t even consider buying their books elsewhere. Just like successful virtual economy operators, Amazon has a considerable degree of monopoly power over its customers. But the market structure it has put in place for books on its site is not the monopoly structure – it’s the price ceiling structure. For each title in its catalogue, Amazon lists not only the price of buying a new copy, but also offers from sellers of used books who carry the title. Buying a used one from a third-party bookseller is almost just as easy as buying a new one from Amazon. Why does Amazon do this? Sure, they earn a small commission on each used book sold through Amazon.com. But wouldn’t it make more sense to assert a monopoly on their site?The existence of a second-hand market, also known as a secondary market, certainly results in some consumers buying used instead of new (it “cannibalizes” primary market sales). But here’s the trick: it will also result in some consumers buying new who would otherwise not have bought anything at all! This surprising effect is explained by the fact that the existence of a secondary market can increase the total lifetime value of a book to someone buying it from a store. After consuming the book’s content, the reader now has the option of selling it to earn back some of their money.
  • Another factor to consider in exchange mechanism design is engagement. By engagement, I refer to anything that the exchange mechanism requires the participants to engage in doing in order to successfully trade. For example, this could be negotiating, haggling, hawking, touting, searching around, establishing trust, and so on. Often this type of activity turns out to be fun content for players.However, in conventional economic analysis, actions like negotiating and searching represent transaction costs. Advanced exchange mechanisms achieve efficiency precisely by eliminating actions such as these. Buying or selling something through a streamlined digital bourse involves no social interaction at all. Having a comprehensive search index makes finding goods and bargains so easy as to present no challenge. But from a game design perspective, inefficiencies like negotiation and search might be desirable. Eliminating them might eliminate what was interesting about the market in the first place. There is thus a trade-off between efficiency and engagement.In summary, a market rich in engagement provides users with lots of things to do, while an efficient market that avoids all engagement provides little. Still, the kind of content engendered by inefficiency is not always the most attractive kind. Searching around and negotiating is only fun to a certain extent, after which the deal needs to succeed so that participants can move on to other types of content.
  • Transcript

    • 1. Designing Virtual Markets forFun and ProfitDr Vili LehdonvirtaLondon School of Economicshttp://vili.lehdonvirta.com/Twitter: @ViliLe
    • 2. What this lecture is about• Item shops, NPC traders, trade windows, auction houses, real-money marketplaces...• Any exchange through which goods change owners• How to design it in a structured manner to support game experience & monetization goals?
    • 3. What this lecture is not about• Designing virtual goods – see my GDC 2010 lecture• Designing virtual currency – see my GDC 2012 lecture• Designing sinks, sources and your overall virtual economy – see my forthcoming book Virtual Economies (MIT Press) with Edward Castronova
    • 4. Where this lecture comes from• Web/mobile game dev 10 years ago• Virtual economy researcher since 2004• Consulting for EVE Online, Habbo, Rovio, Mojang, Gameforge, ...• VirtualEconomists.com
    • 5. 3 Qs of designing a great marketFor each type of good in your game, ask thefollowing questions:1. Market or no market?2. What is the market structure?3. What is the exchange mechanism?
    • 6. 1. Market or no market? Has a marketDoesn’t have a market
    • 7. Reasons for having a market for a good• Buying/selling is fun• Players can specialize in content they like• Publisher can earn revenues by selling goods for real money
    • 8. Reasons for not having a market for a good• Buying/selling doesn’t fit the story• Specialization makes the game too easy• Rare and exclusive items lose their signal value
    • 9. Typical solution• Have a market for – basic gear, commodities, consumables• Don’t have a market for – trophies, achievements, items needed to complete a mission
    • 10. 2. What is the market structure?• Publisher-to-player?• Player-to-player?• Publisher-to-player-to-player?Market structure answers the question, “Whocan act as buyers and sellers in this market?”
    • 11. Six basic market structures BUYER(S) Publisher Players Both Publisher MonopolySELLER(S) Players Monopsony Unregulated Price floor Both Price ceiling Price window
    • 12. Unregulated market
    • 13. Price ceiling Publisher supplies an unlimited quantity at P1P1
    • 14. Price ceiling Publisher supplies an unlimited quantity at P1P1
    • 15. Price floor P2Publisher buys an unlimited quantity at P2
    • 16. Price windowP1 P2
    • 17. Choosing a market structureMarket structures for fun:• Monopoly – predictable game experience• Unregulated market – dynamic experience• Price ceiling – guaranteed affordable items• Price floor – guaranteed minimum rewards – Monopsony – fixed level of rewards
    • 18. Choosing a market structureMarket structures for profit:• Monopoly – sell premium items to players• Price ceiling – sell premium items to players, but also allow second-hand trade – Second-hand trade can both cannibalize and boost sales
    • 19. Example: WoW market structures BUYER(S) Publisher Players Both Publisher Monopoly: Premium itemsSELLER(S) Players Monopsony: Price floor: Tokens Rare items Both Price window: Common items
    • 20. Example: Habbo market structures BUYER(S) Publisher Players Both Publisher Monopoly: PetsSELLER(S) Players Monopsony: Soft currency Both Price ceiling: Price window: Furniture Hard currency
    • 21. Distribution of virtual item prices in PC F2P games30.0% (VirtualEconomists.com 2013)25.0%20.0%15.0%10.0% 5.0% 0.0% $0.00- $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 $11.00 $12.00 $13.00 $14.00 $15.00 $16.00 $17.00 $18.00 $19.00 $20.00 $1.00- $2.00- $3.00- $4.00- $5.00- $6.00- $7.00- $8.00- $9.00- $10.00- $11.00- $12.00- $13.00- $14.00- $15.00- $16.00- $17.00- $18.00- $19.00- +$20.00
    • 22. 3. What is the exchange mechanism?
    • 23. Basic exchange mechanismsPersonal trade Two persons meet, negotiate and tradeEscrow Two persons execute a trade by using a trusted third party as an intermediaryFair (aka ”market”) Many individuals meet at a fixed location to negotiate and tradeSilent fair Many individuals meet at a fixed location to negotiate and trade;(à la EverQuest) buy and sell offers are listed in a central registry to facilitate finding a buyer/sellerBazaar Professional merchants buy and sell goods at a fixed location; prices negotiableStore A professional merchant offers goods for sale at fixed prices at a fixed location
    • 24. Advanced exchange mechanismsAuction Seller announces an item for sale; buyers bid for itDutch auction Seller announces progressively smaller prices until one buyer accepts the dealReverse auction Sellers make bids to get the buyer’s businessAuction house Sellers list goods for sale in a central registry; buyers bid for them through the registryBuyout house Sellers list sell offers in a registry at fixed prices; buyers make deals through the registryBourse Sellers list sell offers; buyers list buy offers; deals are conducted(aka ”exchange”) through the registry
    • 25. Choosing an exchange mechanism Good Frequently traded Thinly traded or commodity good unique good AuctionMarket structure Monopoly structure Store Dutch auction Personal trade Structure with multiple Bazaar Auction house buyers and sellers Buyout house Bourse
    • 26. Choosing an exchange mechanismMost social Personal tradeinteraction Escrow Fair Bazaar Auction house Bourse Most efficiency
    • 27. I see markets everywhere• Drops, harvesting = market where players trade their time i.e. services for goods• Does publisher have a monopsony on service work?• Or can players buy services from each other? – If so, using what exchange mechanisms?
    • 28. Summary3Qs of market design 1. Market or no market? 2. What market structure? 3. What exchange mechanisms?Choose a market structure for fun or profit:• Unregulated for dynamic sandbox fun• Monopsony or price floor to guarantee rewards for play; monopoly or price ceiling to guarantee affordable items• Monopoly or price ceiling with hard currency to monetizeChoose appropriate exchange mechanism(s), using the following criteria:• market structure vs. the characteristics of the good• tradeoff between social engagement vs. efficiency
    • 29. Thanks!Leave your address at http://vili.lehdonvirta.comto get a message when the book is out.Find me on Twitter as @ViliLe.Check out our reports and data on virtual goods &currencies in F2P, social and mobile games athttp://virtualeconomists.com
    • 30. Bonus slides
    • 31. Example: EVE market structures BUYER(S) Publisher Players Both PublisherSELLER(S) Players Monopsony: Unregulated: Price floor: Mob tags Modules Ships Both Price ceiling: Price window: Minerals Trade goods
    • 32. Market structure: Advanced designs• Additional buyer and seller types: third-party developers, advertisers BUYER(S) Publisher Players Advertisers All Publisher Monopoly Monopoly Monopoly SELLER(S) Players Monopsony P2P P2A Price floor Advertisers Monopsony A2P A2A Price floor All Monopsony Price ceiling Price ceiling Price window
    • 33. Market structure: Advanced designsMarkets can be chained to create ecosystems The Facebook Credits ecosystem
    • 34. Effect of a buying pricebot (before) Price Supply P Demand Q Quantity
    • 35. Effect of a buying pricebot (after) Price Supply PB Demand Qd Qs Quantity