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The Economics of 'World of Warcraft'

Blizzard Entertainment Company is one of leading developers in the video game industry. Blizzard rarely publishes titles yet when they do individuals can expect them to be of the utmost quality. That was the case with StarCraft, the Diablo series, and the Warcraft series. Each of these titles has sold millions of copies and are some of the most famous computer games ever developed. In November of 2004, Blizzard Entertainment released a long awaited title, World of Warcraft, and made history by having created the most popular massive multiplayer online role-playing game to date with well over 5 million players registered. World of Warcraft is primarily set in "Azeroth," a mystical world full of J.R.R. Tolkien type creatures. In Azeroth, there are two main continents, Kalimdor and the East Kingdoms, that house a variety of races. These races are split into two groups, the Alliance and the Horde. The Alliance is made up of Dwarves, Elves, Humans, and Gnomes while the Horde is tribal unity of the Tauren, Undead, Troll, and Orc races. Each have their own story and each seek control of the two continents. In World of Warcraft, individuals must complete various missions, gain experience points by fighting high-level creatures, and may obtain prestige by engaging in warfare with the opposing team. There are also areas of the game called "instances" where teams can enter select dungeons in hopes of obtaining rare in-game items from fierce enemies.

It may seem odd to the reader that there are economic laws that take place within the game but, as I soon will show, there are various elements within World of Warcraft that have expanded the "virtual marketplace" in comparison to other games. World of Warcraft uses three different types of currencies: gold, silver and copper. These are the only currencies that are legal tender though individuals may trade using almost any item in the game. Gold, silver, and copper are the also only form of payment accepted at the in-game auction houses; the nature of these auction houses will be elaborated in the following paragraphs. At one point in time, gold was incredibly rare and individuals often used silver to complete transactions. Large amounts of gold were only held by the most skilled of players and individuals who had been saving up funds since the release of the game. Yet in time the supply of gold began to dramatically increase, and with it, the price of all goods in the game. Hence, because of the constant increase in the quantity of gold (e.g., inflation), prices began to rise. Though the quantity of virtual gold has increased, it is not as a consequence of any Federal Reserve or monetary authority but due to the labor of individual players. The supply for gold has been increased by individuals called "farmers," whose job is to kill the most "profitable" (i.e., will give up the most gold) beasts and sell the virtual currency they have acquired in the real world. If one were to look up "World of Warcraft Gold" on most online auction houses, they would find a variety of farmers selling their newly acquired in-game currency. At the beginning of this "farming" trend the price of gold in real life online auction houses were quite high but as individuals began to enter the field, the price of United States dollars per virtual World of Warcraft gold piece dropped significantly. This phenomenon has caused the prices of all items in the game to increase radically and, due to a rise in farming, in-game auction house prices are constantly rising. The abundance of gold in World of Warcraft is limitless, but it must be laboriously obtained from defeating creatures; this creates a deterrent to most individuals that rather buy virtual currency from online auction houses than take the time and farm the gold themselves. This "farming" trend has become so popular that now families in China are using their time to farm gold for World of Warcraft players and are selling the virtual currency on Internet auctions for profit. A variety of families have become dependent on the virtual gold market created by World of Warcraft and "farming." This phenomenon also can be an application of the subjective theory of value. For instance, an individual who purchases virtual gold coins online must prefer current in-game purchasing power versus the present purchasing power of the dollar bills forgone.

Another interesting aspect of the game is how items are bought and sold. In most games, items are sold by the actual software of the game and have set prices. Hence, the software has a monopoly on all items in the game and can sell goods at whatever price it deems is appropriate. In World of Warcraft, however, things are quite different. Individual players often come across items that they either don’t need or can not use, in which case these players go to the virtual auction houses within the game and sell their items at a certain price. The auction houses work just like real auction houses, aside from using virtual money, but they are only specific to each team and one can not sell items at their team’s auction house to a member of the opposing force. The Horde and the Alliance each have their own auction houses and each of these auction houses have different price levels that are often dependent on their population size. As populations increase on either side, so do the number of items obtained. This increase in the quantity of items causes the price of those goods to fall at the auction houses. So, over time, there has been a decrease in the price of most goods as a result of an increase in the amount of individuals playing and the number of items found. Where at the release of World of Warcraft an item could have cost fifty silver coins, may now only cost a couple copper pieces. These auction houses have allowed for prices to fall and rare items to become commonplace. Hence, because of the profit incentives to sell items at the auction houses for competitive rates, the "standard of living" of all characters in the game has increased. By "standard of living" I mean their ability to carry out their online tasks such as winning battles against the opposing team. All characters have become stronger, more advanced, and tougher than ever. There is also a "neutral" auction house in the game where an individual can sell items to all players, regardless of their allegiance. This auction house has served to reduce the price of all goods in the game, on both teams. Where one item may cost four gold pieces at one of the team auction houses, it may only cost a couple silver coins at the neutral auction house. This is an incredible difference and has served to decrease the profits of those who are marking up their prices. All items are cheaper at the neutral auction house and its mere presence has decreased in-game prices. Though the increase in the supply of gold has caused many monetary prices to rise, the real prices of goods are falling.

In World of Warcraft, there are also elements of the division of labor and specialization. Aside from the different races, there are various "classes" to choose from; these classes can be compared to careers. These classes include: Druid, Mage, Shaman, Warrior, Paladin, Priest, Hunter, Warlock, and Rogue. Each of these classes help in different ways when trying to defeat high-leveled monsters. They each lend benefits to their teams by using certain skills to defeat the enemies. Some beasts are only weak to magic while some can only be killed by brute force. Each individual in the game must choose a race and a class as well as specialize in different in-game "trades." These trades may be blacksmithing, weapon-smithing, gun-smithing, leather-working, skinning, tailoring, etc. This has also caused the real prices of goods in the game to fall as well as having introduced various new items and weapon innovations. In each of these cases, classes and trades, the division of labor has allowed increased productivity (i.e., the swiftness and ease of killing monsters) as well as a rise in the "standard of living" of all players.

What is marvelous about economic science is that it can be applied to almost everything. All human action can be analyzed through it and almost no realm is cut off from economic analysis. As I continue my research and expand my intellectual horizons, my understandings concerning the applications of economic science broadens. World of Warcraft may only be a game with no true connection to the real world but it is a realm built by human action; it is a game where all individuals are free to engage in the virtual marketplace. Throughout the game there are instances of economic laws taking place, as I have so described. It is incorrect to believe that economic analysis can only be applied to "real world" occurrences but in fact it can be used to understand all interpersonal relationships, virtual and "real." World of Warcraft is just another instance were Austrian economic analysis is quite useful in understanding in-game trends and developments as well as deciphering the elements that comprise the virtual marketplace.

July 17, 2006

Alexander Villacampa [send him mail] is a sophomore in economics at the University of Florida and summer fellow at the Mises Institute.