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 Posted: Sun Dec 02, 2007 5:46 am
Introduction
While the microeconomic aspects of the Gaian economy (interactions between people, buying and selling things, "working" for pay, etc.) are similar in many ways to real world microeconomic interations, the macroeconomy of Gaia is quite different than that of the real world. These differences are due to the boundaries of the Gaia economy - the resource constraints. The following posts will explain in more detail how the economy as a whole operates. In some aspects it is similar to real world economics, but in some other aspects it's different.
Content:
1. A Simplified Gaia - Gold and Store Items
2. A Simplified Gaia - Gold, Store Items and Old Collectibles
3. A Simplified Gaia - Adding Current MCs
4. Adding More Details to the Economy
5. Differences between Gaia Macroeconomics and Real World Macroeconomics
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Posted: Sun Dec 02, 2007 6:03 am
A Simplified Gaia - Gold and Store ItemsWe begin with a very simplified version of the Gaian Economy; one that has only gold and regular store items. Gold- Gold flows into the economy from the economy at a rate that depends on people's actions: posts, votes, shaking trees, kicking rocks, browsing, daily chance, fishing. (Let's assume for a while that all fish are sold immediately to the store, and that Daily chance gives out only gold). - Gold flows out of the economy permanently at a rate that depends on people's actions as well: naming houses and towns, sex changes and name changes, hairstyles, buying emotes in towns and VJ, arena submissions, etc. StoresGaia's NPC stores are remarkable: at their posted price, they will sell any quantity to any buyer who has the gold. They appear to have an unlimited inventory. They have another remarkable feature - they will buy back any number of items for half the price they sell it. They appear to have unlimited funds. The stores' unlimited inventory and unlimitd funds may pose a problem to regular macroeconomic models for the raltionship between the amount of money in the economy and the amount of goods in the economy. These models assume that both these quantities are limited, and therefore the relationship between them is meaningful. But if the economy includes a store that has unlimited amount of both, these models don't hold. The solution to this problem is to not think of the NPC stores as stores. It is more useful to think about the "stores" as production centers. They turn gold into items, and turn items back into gold (with some loss of gold in the process). Once we think about the stores as production centers, the "problem" of unlimited inventory and unlimited funds is solved. If look at the total amount of gold in the economy at a given moment, it can be converted to a certain quantity of goods (items). The total quantity of goods (items) in the economy can be converted to a certain amount of gold. And that can happen almost instantly - faster than posting, fishing, voting, etc.. Conclusion: Store items are not seperable from gold. The aggregate of gold + items is fixed in the short run, but neither of them (seperately) is. Definition: I will call the aggregate of gold and regular store items the aggregate regular good from now on. The Aggregate Regular GoodRegular store items do not deprecite. Using them, trading them and storing them does not effect them. They are infinitely durable. Gold behaves pretty much in the same way. The aggregate regular good, in contrast, does depreciate. How does that work? Imagine that Gaian A has 20 gold, and wants a 20 gold shirt. If A is the first Gaian ever to want that shirt, or if no one else is selling such a shirt at the moment, A can go to the store and manufacture a shirt. When A no longer wants that shirt, and needs gold for some reason, A can go to the marketplace (or exchange), and sell that shirt to some other Gaian. If there is no such Gaia around (or if time is pressing, or if the MP slots are filled with other items, or...), A can sell it to the store for 10 gold. This process destroyed 10 gold. The point is that while it may be the case that for each person this process happens only every now and then, and some people look for buyers and are willing to wait more than others, for the economy as a whole this is a significant process. Item recycling is done on a larger scale after item release, when more gold is needed in a short period, but it is a constant process that affects the amount of gold in the economy. The question of whether the 10 gold was destroyed when A bought the item from the store or when A sold it back to the store is not very important. The economy as a whole is the sum of many individual users, and the differences in timing between users are averaged out. Items' PricesStore items' prices in the economy as a whole should be roughly bounded by the stores' buy and sell back prices (take a look at the price of a cigarette to see that this is not always the case). Whether prices are closer to the stores' sell price or the buy back price is determined by the dynamics of demand for the items. trade between users occures when there are users who have bought the store items but now attempt to get rid of the item - it means that as items get older (time passes since they are introduced) their prices are more likely to decrease. This does not have to be the case for all items and all times, but the rough boundedness between stores' buy and sell back prices does not change over time. It means that there can't be any significant long term rise in store item's prices. Why do we want / need gold?At a first glance that would seem like a silly question*. We want gold because we can buy stuff with gold, and we want stuff. The general rule of thumb says the more stuff we have, the happier we are. This is not a cross-sectional statement (richer people are happier) or an over-time statement (when we are richer we are happy) - it's a statement about what we want at any given moment - if someone thinks that they'd be better off with fewer items, they can just give them away, but in general people would like to have more, not fewer, items. There is also a balance betwen the amount of gold one has, and the value of one's items. Even though items are useful and gold isn't in and of itself useful (we buy things with gold, but we don't enjoy it directly), we still keep an amount of available gold at hand (I'll refrain from using the term "cash" due to the potential confusion with Gaia Cash). See wikipedia's money for a list of the common reasons for holding gold - these reasons are valid in Gaia as well. The general rule of thumb is that the more your items are worth, the more handy gold you'll have. The ratio of gold to items may increase or decrease as you get richer / poorer, but the general elationship is there. Interim Summary- Gold and regular store items are very similar, and only the aggregate regular good which is comprised of both of them is fixed. Each one of them on its own is not fixed, even in the short run. - The prices of store items are bounded, and as such there can be no significant long term increase or decrease in prices. The next post will add old collectibles to the simplified economy... * If any of you said "I don't", this is the place to say that I'm always accepting donations.
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Posted: Sun Dec 02, 2007 3:19 pm
A Simplified Gaia - Gold, Store Items and Old Collectibles
We now add old collectibles to our simplified version of the Gaia Economy. By old collectibles I mean collectibles that are no longer available for purchase from the store. This analysis holds also for old event items, but not for rare items. The important attribute of old collectibles is that they are in fixed quantity in the economy (not their rarity or their high prices).
The Value of Old Collectibles
There are three components to the value of old collectibles:
- Direct usage value: just like any other item, your avatar looks nicer if you wear a collectible.
- Indirect usage value: by wearing an old collectible collectibe you demonstrate wealth. Some people might wear hideous outfits just to demonstrate their wealth.
- Investment (resale value): old collectibles are in limited quantity, and since Gaia is a growing community, as more people join the community the demand for these items increases. This increases the value of old collectibles over time. One way to get rich is to invest in old collectibles, and "cash in" on them at a later date.
The first source of value of collectibles (direct usage) is the fundamental one (the second one plays an important roles sometimes, but usually not as important as the first one). The resale value of an item depends heavily on the beliefs in the future usage value - there is no reason to invest in an item that no one will use in the future, because everyone will realise that no one will use it, and no one would want to buy it. How exactly beliefs about the future are formed is a good question, but it's unimportant for now.
The Price of Old Collectibles
The price of collectibles, unlike the price of regular store items, is unbounded and is determined in the marketplace in exchange between buyers and sellers. To understand how the prices are determined, let's assume for a moment that the economy is comprised of similar people who all have similar tastes and similar inventories. We can call one of those similar people a representative Gaian (not in the "no taxation without representation" sense, but in the sense that since everyone is the same, by looking at one we get a good representation of what everyone is doing). Let's also assume that both the regular aggregate good and collectibles have decreasing marginal value, meaning that owning the first increment is more valuable than owning the second increment, and so forth. Owning more is good, but owning the third OMG hat (or third UFO) is not as important as owning the first one. Similarly, the benefit of owning an extra 1,000 gold is not as big when you already have items and gold worth 1,000,000 as it was when all you had was worth 5,000 gold.
Before we continue, it's important to remember that this is not the full reality of Gaia. This is a simplified model of the economy. It might fit better in some cases than in others (the fifth Mecha form will finish an amazing set, and therefore may be worth more than the fourth one for some people, for example). But to understand the interaction between the elements of the economy, it's important to make some simplifications. Some of these assumptions we made are more restricitve than others, and some are more reasonable than others; just keep in mind that this is an illustrative model, and this is what it's for.
Back to our model, we can now ask the question: how much gold will our representative Gaian want to compensate her for loosing one collectible item? This would be the amount of gold she sells it for in the marketplace, and therefore would be the market price of a collectible. But let's think about it as the amount of gold needed to compensate her for the loss of a collectible. We do not ask about a specific collectible item - let's think about an abstract collectible item. The answer, of course, will also be kind of abstract - an unspecified amount of gold, which we denote by P (price!).
The interesting thing is what would happen to P when we change things in the economy. The following paragraph will explain several potential changes.
Sources for Price Changes: More Gold
Let's say that our representative gaian received some gold from an unspecified source, and is now richer. What would happen to the price of the abstract collectible's price P? Well, the price is the compensation our representative agent would want (in gold) for giving up a collectible. We assumed that the marginal value of gold is going down in the amount of gold one has, meaning than the more gold one has, the less valuable additional gold is. So now, P would not be enough to compensate our representative agent for the loss of the collectible (remember - P was just enough to compensate her befire she got richer). So, if the representative agent gets richer, collectibles prices increase. This is a place to remember that we're talking about a representatibe Gaian, meaning that this is actually what happens when more gold flows in to the economy in general, not just a specific user getting richer.
Sources for Price Changes: More People
Let's assume for a second that more users have joined Gaia, and they are just as rich in gold and regular store items as the other ones. What will happen to the price of collectibles? Well, when more people join Gaia, our representative Gaian (we can think of her as the "average" Gaian) will have fewer items. We have assumed that the marginal value of a collectible is decreasing (the 10th collectible is worth less than the 9th, for exmaple), which means that if the representative agent has fewer items now, the value of the last one increased. Therefore, to compensate her for the loss of a collectible, she would need a bigger compensation in gold, which is the equivalent of a price increase in the marketplace.
Sources for Price Changes: More Collectibles
Every month, "new" old collectibles are added to the economy (current MCs become old MCs at the beginning of the month, as well as quests and event items that become "old" according to the definition at the beginning of this post). If no gold was flowing into the economy, the inflow of old items would have made the quantity of old collectibles increase, lowering the marginal value of collectibles, thus lowering MP prices. However, gold keeps flowing into the economy...
The Unspecified Old Collectibles and the Representative Gaian
Now that we've seen what happens to the price of an unspecified increment of old collectible, we can go back ask what exactly is it? Does it mean an additional UFO or Katana, or does it mean adding thhe Wild things at the beginning of the month. The answer is both. If you think about what happens when we add a Katana to the economy - it could be that the next gaian "in line for a katana" (and the position in line is determined by the willingness to pay for a katana in the MP) values it less than those who already have it (this is why two people are actually willing to trade - the buyer, upon realising that he's willing to pay more than what the seller is asking for, is switching places with the seller in the "line for getting katanas", leaving the seller without that katana and the buyer with it). When we think about adding a new old item to the economy, it just pushes some items backwards in people's queues of wants, leading to some items losing in value (since we assumed decreasing marginal value...).
How to Generalize This?
Any macroeconomic change to Gaia is a combination of these three effects. When a user is banned (which is an unfortunate event), his old collectibles and his gold and store items are all removed from the economy. If the user has more collectibles per gold than the average Gaian, the net effect would be to increase prices. If the user had more gold than collectibles, the effects would be to decrease prices. In a similar manner, other changes can be interpreted.
What is "the Economy" ?
The relevant "economy" we need to think of when we do this kind of analysis is, in a loose sense, the "active" parts of Gaia. This means that is a user hasn't logged in for a while for some reason, their gold and items are no longer an active part of the economy. In a similar manner, if someone is just a collector of MCs, buys them when they are new and never intends on selling them, these collectibles are not really a part of the economy. These MCs do not interact with gold in any way, and therefore have nothing to do with old collectibles prices. This leads to some intersting potential scenarios to think about, like what would happen if old "dormant" users become active again...
Interim Summary
- When more gold than old collectibles flow into the economy, prices of collectibles rise.
- When more people join Gaia, prices of collectibles rise.
- If old collectibles leave the economy ( sad ), prices of collectibles rise.
This is all quite intuitive, and seems similar to real world economics. The next post will deal with the differences between Gaia macroeconomics and real world macroeconomics.
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Posted: Mon Dec 10, 2007 3:42 am
A Simplified Gaia - Adding Current MCs
The price of current month's collectibles is determined by a balance between the demand and supply. However, in the exchange economy of Gaia, demand and supply are not as easy to separate.
"Supply"
New MCs can only be purchased for real world money (regarless of the mode of pay - credit card, cash card, paypal, phone or the old fashioned way of money in an envelope). There are different reasons people buy MCs for real world money; some buy them to use as soon as the items are revealed, some to save as an investment, and some to sell in the marketplace or the exchange, and some just because they like Gaia and want to participate in its success (or don't mind paying for the great service they get smile ). Some people buy several MCs, probably for more than one of these reasons. The total number of collectibles bought for real world currency determines the total number of collectibles in the economy.
"Demand"
The marketplace demand for MCs depends on the characteristics of the collectibles themselves (number of poses, popularity, etc.) as well as potential buyers' beliefs about future demand for the items, and the amount of gold people have in their disposal.
Complications
The marketplace price for current collectibles is determined as an equilibrium, affected by the intersection between peoples' willingness to pay real world currency for the collectibles and their willingness to accept gold for these collectibles, and the willingness of people buying collectibles with gold to pay gold for the collectibles.
The complications are numerous:
(1) The same factors that affect demand affect supply - when items are popular, people want to buy more of them - both the ones paying real world currency and the ones paying with gold. Therefore, it is not even obvious that popular items will be more expensive when they are new.
Let's think, for example, on a not- so successful collectible. "Investors" wouldn't wnt to buy it as investment. Still, many users will want it untill next month's collectible comes out, just to look updated. It means lower supply (fewer MCs bought for real world currency) and lower demand (for the same gold price, people would want to buy fewer collectibles). Whether prices go up or down depend on the relative magnitude of these effects, but there is no clear prediction.
(2) People's willingness to accept gold for collectibles they purchased with real world currency depends on the amount of time and effort they'd have to "invest" to get a similar amount of gold by hanging out in Gaia. The easier it is to get gold, the more gold it will take to convince someone who have paid real world currency for a collectible to give it up.
But the real complications are still ahead of us:
(3) There is a difference between people's tendencies to buy collectibles. Some of it depends on the time they have been on Gaia. So as the "Gaia age" distribution changes, so does the ratio of people who buy collectibles for real money and those who would only buy it for gold. Another difference that depends on "Gaia age" is people's perception of the value of gold - older users are better at earning gold, hence it is (an average) less valuable to them, so it will take more gold to compensate them for giving up on a collectible purchased with real world money.
All the factors described here interact with each other, and the result is an equilibrium outcome - price and quantity of monthly collectibles.
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Posted: Tue Dec 11, 2007 1:00 am
Adding More Details to the Economy
The different types of game items (bait, fish and fish items, bugs ink and tattoos, paper and paper items, flowers and bouquets, tokens and tickets) are additional elements in the economy. They can generally be categorized as either a part of the aggregate regular good (if they can be bought for gold, sold back to the store for gold, and in general are available in unlimited quantity, with the added complication and "hasstle" of playing the mini games), or as "other items" (items that can not be sold back to the store, and accumulate in the economy at difference paces depends on their rarity, from the common paper hat to the rare fish masks).
Rare event items such as giftboxes and chests, as well as the items whithin them could be thought of as belonging to the "other" category (can not be sold back to the stores, and accumulate at a certain pace). The pace of accumulation depends not only on site usage (the way the amount of trash from towns accumulates), but on luck as well. That said, Gaia is no exceptions to the laws of large numbers, making the aggregate accumulation of these random events converge to the average rate they should accumulate regardless of any user's luck.
Cash store items are similar in spirit to collectibles, whether current (if still sold in the cash store) or old. Old event items have the same function as old collectibles, and new event items are similar to current collectibles, except that their quantity is determined by the effort needed to get them, and not the willingness to pay real world currency for them.
Each of these types of items can be analyzed in a similar fashion to what I wrote in the previous posts.
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Posted: Tue Dec 18, 2007 7:45 am
Differences between Gaia Macroeconomics and Real World MacroeconomicsThere are a few differences between Gaia Macroeconomics and real world Macroeconomics. The most important are the following: 1. Gaia gold is more similar to commodity currency that to fiat money. Just like gold in old times in the real world, a fixed amount of gold can be turned into a certain good at any time (think medival Spain, for example). Unlike the real world, the range of goods that are made of gold is enourmous - all store items, basically. This is very different than modern real world paper money, or "fiat currency". Changing the amount of money in a real economy does not change the amount of goods in that economy, so prices have to adjust to the increased amount of money. But in Gaia, gold and goods (not all of them, only store items, but still) are the same. Thus, changing the amount of gold in the economy does not directly translate into price changes. Some gold will become items, some will go to raise the price of collectibles and event items. 2. There is no "investment" in Gaia in the Economic sense. Economic investment accordint to Wikipedia is "production ... of goods which are not consumed but are to be used for future production". Excpet for fishing rods, there are no purchases that can be used for future production, and have to bought in advance. This means that there is no natural source for interest bearing "savings". I'll probably devote a whole article to the potential (and potential problems) of Banking in Gaia in one the of the following issues of the GJE.
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