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More and more online games are planning to allow the use of real money to purchase ingame items in addition to the standard ingame currency. Diablo III for example, which will be released next year, will feature a gold-auction house (only ingame gold allowed) and a real money auction house (only real money allowed) to trade items between players inside the game.

Gresham's Law says that: "When government compulsorily overvalues one money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."

People are worried that ingame gold will be severely undervalued and real money will be dominating because the developers of the game get their share from real money transactions and want to push this currency. They are the government that might compulsorily overvalue real money and undervalue ingame-gold. This means according to Gresham's Law that we will see the ingame currency gold vanish over time, leaving the real money auction house as the only option to buy and sell items.

This leads to the question, if Gresham's Law can be applied to this scenario. What are the reasons why or why not Gresham's Law will effect online games with real money and virtual currencies combined in the same market.

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migrated from economics.stackexchange.com May 3 '12 at 18:12

This question came from our site for economists and graduate-level economics students.

    
@Turukawa Please ask before migrating a question. This is not relevant to startups. You can ask on our meta or pop into chat. –  Zuly Gonzalez Apr 28 '12 at 18:10
    
This is an economics question about games, not a game dev question. –  Byte56 May 3 '12 at 18:17
    
It's been migrated because the Economics stack exchange is closing down. With that in mind, I don't know if there is a better home for it. –  Kylotan May 3 '12 at 20:29
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Interesting question (and answers). I like seeing this kind of thing here now and then. –  Tim Holt May 3 '12 at 20:37
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3 Answers 3

up vote 7 down vote accepted

Although the theory applies, I suspect that you would not see the in-game currency driven out of circulation.

Gresham's law requires legal tender laws to enforce a particular price relationship between two monies. For example, legal tender laws in the US set the price of silver in terms of gold at 16:1 in 1834. But the market price for silver was higher than that, for example 15.5:1 (no citation available). This caused people to use the gold coins and to melt down silver coins.

Now let's say that the market equilibrium between US dollars (USD) and Diablo III Gold (D3G) is 1:100. This market value is based on the supply of USD, the supply of Diablo III, and the demand for goods that are priced only in USD versus the demand for goods that are priced only in D3G. (Example: if Diablo III suddenly becomes very popular and players suddenly demand more in-game items, then the D3G may appreciate in value, such as changing the ratio from 1:100 to 1:80.)

The game's publisher creates the equivalent of "legal tender" laws by mandating the ratio between USD and D3G. If they set the ratio at 1:200, then they have overvalued the USD and Gresham's law predicts that gamers will spend their USD (putting it into circulation) and to hoard their D3G.

But the problem is what do gamers do with their hoard of D3G? In the gold/silver example above, people could melt down silver to reform it into items of higher value, but you can't do that with in-game currency. In real life, people can smuggle their valuable coins to other countries where legal tender laws don't apply. But in the video game, there is nowhere to take your money that is beyond the reach of the game's creator.

Left with no other choice, I imagine that gamers will continue to use the inferior currency due to lack of better options.

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Airline miles would seem to be a useful "real-world" example of such a proprietary currency:

From The Economist

Both history and recent financial troubles suggest that frequent-flyer miles will not improve with age. If you can't use all your miles on flights now, you could try to sell them. The fine print of every programme prohibits the sale or barter of miles, but there is a black market of brokers, such as Award Traveller, which will buy your miles at a discount (by paying you to redeem them for a ticket for one of their customers). However, if the buyer is caught with your award ticket, it will be confiscated and your frequent-flyer account permanently frozen. Some members who have sold their miles on eBay have also had their miles revoked.

From The Economist.

As with airline miles, the likelihood is that secondary exchanges will emerge (such as Account Market) which permit people to trade. These are technically illegal in terms of the license conditions of the game worlds, but similar rules haven't stopped airline miles exchanges.

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Gresham's Law only applies if, when you want to sell something, you are forced to accept different kinds of currency, and you cannot set the price in each of those currencies independently.

In Diablo III you can choose which currency to accept: in the gold-based auction house only gold can be used, and in the currency-based auction house only real currency can be used.

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