The Critical View: Moral Hazard and MMORPGs

 

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THE GODS AND ALL THEIR POWER…LESSNESS

Let’s go straight to the point: I think that working for an MMORPG company is like playing god. You create content, you nurture communities, and you live the alternate life as THE MAN.

Here is the thing though, the gods that control MMORPGs are not necessarily all-knowing and omnipotent. In real life, they are also human, just like us, subject to the pains of life and pressures of the job. The gods that we are talking about are working for companies. Some might be having the time of their lives, while others might be underpaid, underemployed, or worse, BOTH. The direction is not necessarily theirs, but of the overall direction of the business. And we all know that businesses thrive to profit.

Doesn’t it pose some moral risks? Some moral hazard? How do we know if they are treating gamers fairly? How do we know if their job, rather than to preserve balance, is to preserve imbalance?

Moral Hazard is actually a relevant business issue. But first off, what is moral hazard? Well, let’s consult the handy dandy encyclopedia for investments. Here is a definition of Moral hazard, as defined by investopedia:

“The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.

Still having a nosebleed? Let’s go have a concrete example, care of the business of banking and insurance:

“For example, you might get unlimited car insurance on your rental car. This creates a moral hazard. If you drive through the mountains, you may not worry about banging it up on rough roads or scratching it up in thick brush. In other words, you might be reckless. Any damage to the car is not your problem, but it is somebody’s problem.

Moral hazard says that the more you feel insulated from risk, the more temptation you have to take it.

 

 

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THE SAD AND SORRY CASE OF DIABLO 3’S HYPERINFLATION

Moral Hazard is a corporate issue that even encompasses the video-game industry. For MMORPGs, it could take several forms. Remember, this is an alternate reality that is still very much governed by the natural laws of economics: Supply and Demand. One school of Austrian Economics, the Mises Institute, had a keen interest with Diablo 3 and the causes for its hyperinflation. (Severe increase in the prices of goods) Here’s their dissection of the supply and demand structure of MMORPGs:

In virtual economies, the primary instruments used to control the money supply are “faucets” and “sinks.” Faucets are ways through which game currency is injected into the game. This generally involve players receiving currency from the game system itself, as opposed to other players. In such situations, the received currency is created anew. Sinks are ways through which game currency is removed from the game. This generally involve players paying currency into the game system itself, as opposed to other players. In such situations, the paid currency is destroyed. Examples of faucets and sinks in Diablo 3 are included below:

Faucets

Drops — When a player defeats a foe, they often receive a reward of virtual gold or a good saleable into virtual gold;

Rewards — The game involves the player undertaking “Acts,” and within each act are a number of “quests.” For completing these, players are typically awarded virtual gold;

Buyers — Players can sell items to “in-game” (computerized, non-human) buyers, receiving virtual gold.

Sinks

Repairs — Over time, a player’s equipment will become damaged in combat and suffers wear-and-tear, requiring periodic restoration from an in-game craftsman in exchange for virtual gold;

Forging — Players pay virtual gold to an in-game blacksmith for weapons;

Rakes — Using the gold auction house costs players both a listing fee and a transaction fee, removing virtual gold from the economy;

Consumables — Players can purchase potions, scrolls, and other items from vendors for virtual gold.

The reason why the Mises Institute suddenly became interested with Diablo 3, was its case of severe hyperinflation. Here’s the main takeaway:

  1. The game had existing gold miners and bot hackers that the game developer was not successful to regulate. Reports had gold farmers making 4 million gold per hour.
  2. Blizzard had established a Real Money Auction House (RMAH) which motivated players to actually make real money. Play the game, make some actual US Dollars.
  3. There was a news leak that the Patch 1.05 would double the drop rate in the game. This made the demand for goods and cash so low, that people started selling furiously and convert in-game money and items to Real Money through the RMAH.
  4. The sell-off was so furious, that in-game cash became so cheap, but in-game items became so expensive, since the demand for money was low
  5. Diablo devs had to fix everything, marring their reputation, the game’s reputation and a sour taste to those who were caught in the deluge

 

 

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GOING BACK TO MORAL HAZARD

You see, this is how economics can be used as a powerful tool, even more powerful than war itself. Put it in a simulated situation such as an MMORPG, and you can see how people can potentially…play god. They are the gods that control the fate of the game. They control the sinks and faucets. They control the rate of change. In fact, they are the change.

Not everyone’s like Blizzard, who still was man enough to fix the situation. If you have noticed, they have corrected themselves and therefore acted like a Self-Regulating Organization (SRO). But what about other developers? Would they have done the same thing?

These companies are “for-profit” organizations. They exist to profit. If they don’t think they are not making enough money for a certain game, they could just do a sweeping inquisition of rare drops and force players to just use the item mall to progress properly. If they want to act like a good guy during a new game’s release? Double EXP earnings, double drop rates, and let the item mall drop by 50% in price. They can use that as bait to either get the gamers play that MMORPG or to get the gamers actually buy items of the item mall or auction house. Profits first, feelings later.

Simply put, who is maintaining the checks-and-balances for MMORPG developers and publishers? While gamers are enamored by the challenges, the stories, the rewards that MMOs provide, who is to say that they are being treated fairly?

No one. And that’s the point. There’s no regulatory authority. I think this is the industry that can actually do with Moral Hazard and get away with it clean. While others would argue that a country’s Securities and Exchange Commission (SEC) can actually do the monitoring, the argument is valid only for fair trade: Post an Item for USD 5.00 in the Item Mall, gamer should get it once he pays USD 5.00 online

But what about the MMO’s daily economy, who is checking whether the practices are actually fair?

No one. And many would argue about its practicality. To be honest, it’s something that the free market will dictate. If the economics of a game is bad, gamers will leave for a new one. If it’s not screwed up, gamers will stay. So it’s basically a hit or miss, or a hit until it becomes a miss.

And that’s the point. It’s hard to earn time and resources to play, and it’s even harder to trust a game. In the end it becomes similar to gambling where the “House always wins.” Gamers might as well get used to the vicious cycle of being used. This is the part where gamers get fed up, log-out, and live life. Gamers don’t deserve uncontrolled BS.

You know what’s worse, this is just moral hazard for the economics of the game. There’s bound to be more, and we’re left with the biggest pile of odorous excrement in the history of capitalism. (a reference to the movie Margin Call)

Moral Hazard, at the expense of gamers. What a pain.

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