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I’d like to point out to the nay-sayers of this shift to a “virtual” world, that these games and communities are first and foremost a form of entertainment, something to enjoy, and no one is forcing anyone to spend time there. If I choose to spend my evenings in an online community instead of watching endless hours of mindless reality TV, that is my choice. If YOU choose to spend your free time reading, going to movies, biking, hiking, skiing, walking around the local mall, playing ball, etc… that is YOUR choice, as is the money you choose to invest in these recreational activities. You are paying for your form of entertainment and relaxation, don’t judge someone else’s form relaxation negatively just because you personally don’t enjoy it.

Out of these virtual worlds and online communities come strong friendships, relationships, marriages, etc.. People, by being forced to get to know each other on an intellectual and emotional level FIRST before the physical nature of humanality takes over creates a stronger foundation. People that are shy, insecure, or suffer more challenging social hurdles such as being physically disabled benefit from such less biased social interaction. Its based on thoughts, words, intellect, common interests. Yes, the lack of voice intonation and facial expressions create its own set of hurdles, but those can be overcome with voice com programs, video, and each “games” form of emoticons.

Its only natural for a business world to develop from this social world. Real world bars and clubs are a business founded on social interaction. Movie houses, restaurants, even sports are all a form of social interaction and a way to pass the time, and all are flourishing businesses. Its only natural for that to apply to a rapidly growing online community. People work every day in cubicals with computers their only “human” interaction being a phone, video conferences, emails, and instant messages. Technology, whether anyone wanted it or not, has BEEN mainstream for decades in the corporate world. It should be no surprise that the medium that people use day to day for business, that they are comfortable with, should also cross over to their social world, and eventually as we see now into entrepeneurship. The provision of real and virtual goods from an online community have a solid foundation in personal expression (after all isn’t that what a painting is? a poem? forms of personal expression?), individuality, creativity, enjoyment, and any other number of things.

Like the telephone, like TV, like Video Cassettes, like computers, this virtual world *is* now a reality and to fight it is pointless. Yes, there are many other uses for technology to help fight suffering, hunger, etc… And I personally am confident that in time we will see those included, but it has to start somewhere, and human entertainment… the smile factor, has always been and always will be a driving force in any technological, medical, social, advancement.

Shannon, I agree with you that “cost of production” is not much of a factor to pricing for virtual goods such as virtual currency in MMO games like World of Warcraft, Lord of the Ring Online and such, the price the buyers value is based on the perceived value of time buyers and experience that they get from the games.
So we see people buying 100 virtual golds in WoW for $6 while it only costs $1.25 to produce.

This may come as a bit of a shock as you are clearly speaking the language of very traditional economics but prices DO NOT work how you describe or think they do.

Instead (and many very serious economists of even different schools of thought will acknowledge this - but then deal with it in different ways) price itself is a signal and exchange of information - which helps CREATE and effect the market in those goods or services.

To illustrate the “price” of a work of art is often inherent in creating the “value” of that piece - i.e. how do you become an artist who’s works sell for tens of thousands? in essense, in very large part you have the gumption to ask for those prices.

And before you claim that price and supply and demand always move in the same directions (i.e. that lower prices create more demand), this is by no means at all always the case.

Free (or nearly free) goods and services usually have a perceived value which is very low (even if they actually have very high volumes and thus represent significant “value” in the aggregate).

There have been very real and successful businesses which found that pricing say a piece of software at $99 resulted in very low sales - but that pricing the SAME product for $9999 (yes no typo - 100x more costly) actually generated MORE sales as well. The perceived value of the product had changed - and with that, it entered the radar screen and potential interest of more and/or different people - more of whom then chose to buy it.

With virtual goods I think that very low prices (i.e. virtually free ones) could be a very very serious mistake on the part of the businesses. That this would, in turn, radically diminish the volume and the level of interest of the users of those services.

In the case of the virtual flowers on a service such as HotorNot. By being very expensive (even relative to “real” flowers) they are thus sending a very strong signal and gesture - they are not a random or spurious act - but rather are something which for most of the users has a real impact to their budgets - so as a signal of interest in another they are a very good one (and are, actually, cheaper than buying what I personally would usually buy for a woman in the “real” world - which is not a single flower but rather a whole arrangement - on which I’d almost never spend only $10 because in the real world that would clearly show).

i.e. the price helps MAKE the market.

This is something which I think more companies - on and offline have to recognize - that strange as it may sound, the route to success (and at times volume) is NOT by lowering prices to zero - but by raising them to the level at which they help create real value and meaning associated with what is being sold.

And the “costs of production” really do not enter into this arguement much at all - prices are not inherently based on the costs - rather the prices which people actually PAY are based on what the BUYERS value at the time they value - yes,the sellers have to also choose to accept those offers from the buyers - but they also have to realize that in most cases the buyers do not care what you paid for the good (or will pay to fulfill a service) - rather the buyer attaches a value and is thus willing to shift only so many resources at this point in time to that offering.

Complicated perhaps - but also more how the world actually works.

Shannon

[I haven't yet published it but I have been working on a book on Economics for a while, which among other things focuses on the networked and dynamic nature of economics - in the real vs. theoretical world]

Interesting posting from you.

With respect to Blizzard and their combat of “gold farmers”, what I would note is that selling virtual goods is simply one alternative for monetizing an online entertainment property. There are really only a few options to chose from - paid subscription, selling minutes, selling virtual goods, and selling ads. It’s up to the owner (developer) of a property to decide how to monetize, if for no other reason that their choice of mix needs to be done in conjunction with overall design decisions for the content.

With respect to WoW in particular, it’s clear that Blizzards’ anti-farming policy varies across geographies. It’s most intense on US servers, much less so on EU servers, as per a recent study; I would guess it’s not much of an issue on China servers since their revenue model there is selling minutes (which is a close approximation of selling virtual goods).

I would argue, and you might disagree, that the end-user value of WoW players to buy gold is minimal. It’s not needed to enjoy the game, and it’s impossible to use gold to compensate for your lack of ability/time to do hardcore endgame raiding anyway, given their BOP (bind on pickup) strategy and the social conventions that follow from that. Gold is bought because it’s available, if it wasn’t available, I don’t see why it would materially influence a player’s decision to renew or not renew the paid subscription.

Peter S Magnusson
http://petersmagnusson.com