Video Game Economics

When I'm not writing for Catallarchy, doing schoolwork, or spending time with friends and family, I play the online video game Diablo II. This game is over five years old - ancient by computer game standards - and yet I've been playing it ever since it was first released. What explains this longevity?

Player interaction is probably the best explanation. A game played against a computer gets fairly old after a while, as the player learns the strategies and responses of the pre-programmed AI. Interaction with other players, on the other hand, provides a human element, in which players form both friendships and hostilities, as well as the unexpected and unpredictable nature of other people's strategies. I plan to go into more depth in my future posts on the social interactions present in such a game.

Another explanation, more relevant to this particular post, is repeatability. Most games end once the player kills the final boss or completes the final quest. Some people will even replay an entire game from the beginning even after beating it, but this tends to get old after a while. What makes Diablo II - and the larger genre of Massively Multiplayer Online Role-Playing Games (MMORPGs) - infinitely repeatable is that the game does not end at all. The focus is not so much on completing various quests, although quests are an important factor; rather, even after finishing the game, players continue to "level-up" their characters and search for new items with which to arm these characters. The game designers intentionally implement techniques such as logarithmically scaling the experience necessary to gain an additional level and making some items as difficult to find as winning the lottery in order to provide long-term goals for players who wish to stick with the same game for years.

And of course, since there are many people trying to achieve these goals, but who may not be able to make the time commitments necessary to reach them, there are other people willing to help them - for a fee.

This is generally frowned upon my many players, for a few reasons. First, they deem it unfair: why should a rich player be able to gain an advantage over a player who cannot afford to buy such items? But money is simply one of many scarce resources; time is another. Why should a player with large amounts of free time have such a strong advantage over those who do not?

Another criticism is that it is just a game. It seems a bit foolish to spend money on bits and bytes that don't really even "exist," especially since the point of a game is to actually play it, and not pay someone else to play it for you. While there is something to be said for authentic achievement, most of these criticisms fall apart on careful analysis. The game itself doesn't really exist, as it is just zeroes and ones encoded on a round piece of plastic and stored on various hard drives. To pay for a virtual item is not much different than paying for software in general. And as for the authenticity argument, different people derive pleasure from different parts of the game. Some players wish to play competitively, and in order to keep up with those who can devote more free time to the game, they must compensate by purchasing the fruits of other people's time commitments. Some players, primarily those interested in dueling with other players, do not enjoy item hunting or the slow process of gaining additional levels. Instead they use their time spent working at real life jobs to replace these undesirable aspects of the game, and skip directly to the parts they enjoy.

In general, though, people spend their money on all sorts of strange hobbies. Baseball card and comic book collecting are also "virtual" in the sense that the materials used to create these items are negligible compared to the value placed on them in a market of buyers and sellers. People spend large amounts of money on tennis rackets and golf clubs to gain an advantage over their competitors. I don't see much of a difference between these hobbies and spending one's money on virtual items in a video game.

All this brings me to the original point of this post. One of the many websites that sells these virtual items,, has the following disclaimer on its front-page:

We've been receiving a lot of angry email recently about the new prices. If you don't understand the laws of supply and demand, please CLICK HERE for a quick explanation of why prices have gone up.

The explanation it gives is an excellent analysis of the Diablo economy, as well as a good introduction to the basics of microeconomics.

Some background may be useful. A new patch was released a few weeks ago which made item-finding a bit more difficult by making the areas in which people frequently farmed monsters for items much more dangerous and harder to reach. In addition, a brand-new realm was created, in which all players must start their characters from scratch, with none of the advantages of previously acquired items. As a result, the demand for these items, not surprisingly, skyrocketed.

When consumers saw such high prices for what appeared to be the same items that were cheaper in the past, they became angry and assumed that the website was price gouging. This is similar to the reaction consumers have when stores raise prices right before a hurricane. As the above mentioned explanation puts it,

Most suppliers have been shut down and they may never be back because many of the primary item sources have been removed by the patch. The websites that remain in business have experienced a huge influx of orders and we have neither enough items nor enough workers to handle it all! Instead of selling out everything we have in a week while providing bad service all the way, we've chosen to raise prices. This is one way of controlling demand. At a higher price, less items are demanded. Fortunately for everyone, buying Diablo 2 items is a luxury and if you can't afford it, you can easily live without it (nevermind my opinion on public healthcare). Sure some people will be disappointed that they can't buy Vex rune for $1.00 anymore but if we did that, there'd be a huge shortage. If we sold them for $100 each, we wouldn't sell a single one. By setting price at the supply & demand equilibrium, we can maintain quality service, and continue to provide items to those willing to pay. If we charged less, you can bet people would simply buy up all our stock and resell it themselves at a higher price. This is why it is essential that the end seller charge the fair market value for an item.

I don't agree with his distinction between luxury goods and necessities. After all, food is perhaps the most necessary good of all, and yet markets do a spectacularly better job of food allocation than command-and control techniques. And I can't tell from his comment whether he has a favorable or unfavorable opinion of socialized medicine. But his explanation of arbitrage is particularly illuminating.

I'm surprised that more sellers don't try to rebut consumer criticism with similar economic explanations. Not that they should have to, mind you, as if consumers don't like the price, they can simply choose not to buy. But perhaps this may convince some consumers on the margin that these price increases are legitimate and not a result of "price gouging," whatever the hell that means.

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Just a minor quibble: Diablo

Just a minor quibble: Diablo II was released in the summer of 2000... I beta tested it that spring (Diablo 1 came out in Fall of '96 and SC came out in spring of '98).

Regarding your thesis, if more producers/developers could see the power of the economies in their MMORPGs they could utilize it to their advantage - create an easy-to-use system of bartering/trading.

I've used a bit (as have many of my friends) and it's a great example of the market creating an opportunity for buyers and sellers to exchange goods/services.

My understanding is that UO is one of the few games that does not frown upon services like this and even has a built in service of its own (rudimentary).

Oh, and Wirt's leg is neat-o.

Tim, You're right. I was


You're right. I was also a beta-tester but I could not remember if it was 1999 or 2000 when it first came out.

The bartering economy is one of the most interesting aspects of the game. Blizzard had to go to a lot of trouble to disable the SoJ as a form of currency. I would expect much of this to be interesting to Austrians.

Thank you so much for all of

Thank you so much for all of this, it was really helpful. For my economics final I'm doing a project on The economy surrounding video games. I'm not focusing on computer games to much but all off the info on your site applies to other aspects of gaming. I'll quote you in my presentation, thank you again:).