Making sense of virtual property research

VERN is a forum for research on real-money trade of virtual property, but what exactly does that area comprise? There are over 50 entries in the bibliography, from economic analysis to policy studies — is there any pattern or consistency to this work?

In this light literature review and essay, I distinguish between six branches of research relating to virtual property: economic analysis, economic geography, strategic management, design, law and policy studies, and economic sociology. In addition, information systems and investment theory are identified as potential new approaches. The classification is based as much on existing research as it is a shameless attempt at agenda setting.

Thanks to Ben Gimpert for valuable feedback. Looking forward to your comments.

Terms and concepts

Important terms used in this essay include MMORPG, virtual world, platform, operator, virtual economy, RMT and secondary market. Below I provide a brief indication of the meanings in which they are used here. The most important term in this discussion is virtual property, but I will leave its definition to the end. At some places I substitute commodity for property to bring connotations from economics or social sciences.

MMORPG or massively multiplayer online role-playing game is a type of virtual world. Virtual world is a type of virtual property platform. Other possible platforms include community services like Cyworld and IRC-Galleria, which are not virtual worlds, but nevertheless contain virtual property. Operator is a company maintaining a platform. The network of transactions within a platform, not involving real money, constitute a virtual economy.

RMT stands for real-money trade of virtual property: any exchange of virtual property for real money regardless of the participants (i.e. operator-user exchange is also included).

The term secondary market is borrowed from securities trading, where primary market is that where sellers are the originators of the securities and secondary market is that where securities are re-sold by others. In the context of virtual property, the primary market is understood to be that between the operator/platform and players (not necessarily involving real money), while the secondary market is that where players and trading companies buy and sell virtual property between each other for real money. The term secondary market thus refers to “traditional” MMORPG virtual property markets which do not involve the operator, while RMT refers to all real-money transactions.

1. Economic analysis

Castronova’s (2001, 2002, 2004) analysis of the virtual economy and secondary markets of EverQuest marked a starting point in the academic interest in virtual property. At that time it was remarkable that he was applying neoclassical economics, the study of the allocation of scarce resources, to examine a phenomenon that was essentially digital. Thanks to the artificial scarcity prevailing in the game world, he found that he was able to analyse game assets as if they were physical commodities.

Besides Castronova, at least Nash and Schneyer (2004) have performed basic marginalist economic analysis of game assets. Topics include demand curves, supply shocks, price flexibility, profit margins, arbitrage and market efficiency. Macroeconomic indicators like price indexes and gross domestic products have also been calculated.

After these initial studies established that virtual economies can indeed be analysed using economic concepts, subsequent work steered towards applying this method to some useful end. I discuss strategic management, design and policy studies below.

Being perfect commodity markets from which extensive data could in theory be collected very accurately and inexpensively, virtual economies and secondary markets might also be useful for advancing economic theory. This possibility is widely recognised but so far not explored.

2. Economic geography

Economic geography is the study of the spatial organisation of economic activities such as production and consumption. Economic analyses of virtual economies (see above) include discussions on the locations of resources and markets inside virtual worlds, but this “virtual-economic geography” is a minor topic.

With the rise of professional “gold farmers” in low-income countries such as China and Indonesia, the real-world spatial distribution of virtual-economic activities has began to attract attention in academic discussions. I am not aware of any publications though.

As with neoclassical economic analysis, an approach based on economic geography may find applications in strategic management, design and policy studies, which I discuss next.

3. Strategic management

Strategic management is an academic field centered around the question, “why do some firms perform better than others?” Strategy may be defined as a firm’s theory of how to achieve competitive advantage.

What kind of strategy platform operators should take towards RMT is a pertinent question in the business. In the “traditional” MMORPG RMT setting, the operator either takes a laissez-faire attitude towards RMT activities or tries to enforce a trade embargo. In more novel virtual property platforms like Cyworld the operator may be an active market participant.

My Master’s thesis (Lehdonvirta 2005) was nominally in the field of strategic management, but the connection to that body of knowledge was not strong. In it I discussed the options that are available to virtual world operators in relation to RMT. Another author who has discussed operator strategy in relation to virtual property is MacInnes (2005).

So far this approach has centered exclusively on operators. As the business ecosystems around advanced virtual economies grow increasingly complex, new “legitimate” actors will emerge, asking for analytical attention. At that point, concepts such as resources, capabilities and value networks will be pulled up from the strategic management toolbox.

4. Design

In addition to pure curiosity, developers have a clear practical motivation for studying virtual economies. To be able to design, they must have sufficient understanding of the relationship between choices available to them and the phenomena that result.

Such understanding may be difficult to achieve by referring to design mechanics alone. This can be due to aggregate effects, that is the combined actions of a large number of agents (users or NPCs), or dynamic effects, that is the change over time that arises from interactions between agents. Simpson (1999) provides an account of how Ultima Online development suffered from design choices having unexpected dynamic and aggregate consequences.

Economic analysis is one possible approach to understanding complex systems better. Often it is the virtual economy part of a design that requires this analysis, but economic analysis has also been applied to e.g. social relations with varying success. RMT is something designers ignore at their peril.

Bartle’s (2003) virtual world design book has a chapter on virtual economy design. Ondrejka (2004) discusses Second Life’s economy as part of the design of a compelling platform. Huhh and Park (2005) analyse Lineage’s secondary markets and how they contributed to the game’s phenomenal success. According to them, this relationship is a feature overlooked by Western reviewers.

5. Law and policy studies

The largest body of virtual property authorship is that dealing with legal and policy issues. The legal status of virtual property is a pertinent question e.g. for those wishing to create new business that involves virtual property in some way. Occassional conflicts of interest between operators, users and other parties relating to e.g. secondary markets, scamming and nerfing also tend to bring up these discussions.

Scholarship in this field is often normative, providing suggestions on how laws and policies should be in regards to virtual property. Lastowka and Hunter (2004) provide a good description of the different issues and viewpoints. Grimmelmann (2005) discusses the notion of using real-world law to regulate RMT. MacInnes, Park and Whang (2004) describe social consequences and resulting policy choices from MMORPG RMT in Korea.

Fairfield (2005) defines virtual property as rivalrous, persistent and interconnected online resources (“code”). Rivalrous refers to the situation where one person’s use of a resource excludes all others from simultanously using it, typical of physical objects but not of digital resources. This seems to be a key observation that differentiates virtual property from digital content such as music.

6. Economic sociology

In neoclassical economics, value is accepted to be an entirely subjective thing. If someone is willing to pay 500 € for a virtual space ship, then it is worth 500 € for that person. But economic theory does not attempt to explain why or under what circumstances this may be the case.

Economic sociology is the study of the interaction between economic and social institutions. It recognises that economy is “embedded” in the society, and allows us to look for answers to questions that are outside the scope of economics, such as reasons behind consumer demand – a question important to both policy makers and business developers.

Virtual consumerism, that is, people investing their time and money on virtual commodities, resonates well with the authorship on contemporary consumer society: symbolic value, aesthetisation, commodity-signs, identity and so on. The economic sociological approach establishes virtual property as an extension of the same playing field where consumer culture is played out. From a certain perspective, the 500 € space ship is not qualitatively different from 500 € sunglasses.

My own Ph.D. thesis research takes the economic sociological approach to virtual property, but it will be some time until I publish something in this vein. Meanwhile Malaby (2006) discusses transformations between economic, social and cultural capital taking place inside virtual worlds.

Other potential approaches

As novel revenue models and business ecosystems are created around virtual property, new challenges emerge that parallel the research challenges in information systems research and e-commerce: security infrastructure, payment infrastructure, digital contracts and so on. I am aware of companies considering this need and overlap but not of academic researchers.

Another forward looking approach is investment theory. It is possible to develop valuation models, volatility assessments and even derivative instruments for virtual commodities. For example, companies that directly or indirectly obtain their cash flow from virtual property might be interested in mitigating risk by purchasing appropriate options on the given property.

Conclusions

It may seem that the six branches of research identified above are quite far removed from each other. What does the strategic management of Cyworld have in common with economic analysis of EverQuest secondary markets or Habbo Hotel design? The answer is persistent, interconnected and rivalrous resources, also known as virtual property (Fairfield 2005). Virtual property is what connects these topics and approaches together, and sets them apart from research on content business, virtual communities or copyright law. There is overlap too, of course.

Among the branches identified above, none stand out as particularly amazing in regards to academic standards and achievement, with the possible exception of legal studies. This is understandable, since the area is still new and few people have had the opportunity to focus on it full-time. No doubt the situation is improving though. For example, a number of students working on interesting theses and dissertations have shown up at the VERN email discussion list.

While we rigorously apply the tools and methods of our respective academic disciplines, I hope that we at the same time manage to develop common terms and concepts to agree and disagree upon between virtual economy researchers.

What branch, if any, do you identify with?

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2 thoughts on “Making sense of virtual property research

  1. Thank you for the link to this in the Source Identification and Soulbinding thread on TN (and for your kind words about my work there). This is an excellent review of the existing approaches to virtual world economies. I think it would be great if you regularly updated this essay and made it a standing resource on your front page, as it is such a step above straightforward bibliographies.

  2. Thanks for the compliments. Not a half bad idea that, I’ll look into it. I’ll see if I can get more comments on the content though, it seems unlikely that everyone would be happy with the categorisation as it is presented currently.

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