When do you have inflation and when deflation in a virtual economy

Question

In a virtual economy, you can calculate all the income and all the costs (money that sinks) from every user in the game. You can calculate the percentage of the new money on the system or the money that has been lost from the system by the income and the costs.

I believe that having a small positive percentage is not inflation, but from the other side, crucial for the economy. However, I was wondering if there are any rough limits of this percentage that could lead to an inflation or deflation for negative percentage.

For example, if you have every week a result of 1-2%, will not be a serious problem. But if you have 30% or -30%, obviously you will.

Have you found from your experience or from any research limits that could ring a bell?

Answer 1

You can calculate all the income and all the costs (money that sinks) from every user in the game

This is correct. You might also want to consider what players quitting or becoming inactive does to the amount of circulating currency as well if that is possible.

I believe that having a small positive percentage is not inflation

This is not correct. Any change in the total amount of currency is inflation. You may have picked up the idea that small positive inflation is good because it is the opinion of some economists that it is indicative of a growing economy. This does not mean it is not inflation.

Have you found from your experience or from any research limits that could ring a bell?

I have experienced playing games with virtual economies that experienced hyperinflation and there are lots of good questions here on Game Design about designing virtual economies but I can't find anything that points to a particular tipping point for inflation percentage. I can however suggest that you think about it as a problem of player perception and expectations. Inflation becomes a problem when player expectation of future currency value shifts cause undesirable behavior. When does that happen? That depends too much on the nature of the game to give a meaningful answer. That depends as much on how long and frequently players interact with the game and what their cash flow looks like as the global inflation rate.

For instance, if they don't typically save significant amounts of currency, their income is frequent enough to adjust with the rate of inflation and they interact with the game often then a pretty high inflation rate wouldn't be too bad. On the other hand, if they save a large amount of currency and interact infrequently, they may come back to the game after several cycles of inflation to find they've lost a lot of value - which might make them quit and destabilize the currency more.

Answer 2

I dont know what kind of simulation you are aiming for so it is difficult to give a specific answer.

Inflation is usually defined when well, inflation is >0% and deflation is when inflation is negative. In many countries, the central bank aims to keep the inflation at a steady 2-3% per year through the use of monetary policy. Note however, inflation tends to be cancelled out by interest rates or raise in salary.

Also, a useful tool to understand the impact of inflation is the doubling time. Which is the number of inflations that will cause something to double. It can be approximated as 70/(inflation rate), thus, with a inflation rate of 2%, it will take roughly 35 such inflations to cause something worth 100 to be worth 200.

Answer 3

I am not confident that there is a good answer to this question without a lot more detail. It is true that by watching the income and sinks of the currency supply you can track overall currency in circulation, but that is not strictly the same as inflation. They may be (and usually are) related, but there's a lot of other factors that go into it. All you can really track that way is total net worth of all participants.

You could mean in a sense of buying power. (Ie: increase in the overall cost of most goods/services):

In this sense, it will depend strongly on how the money is being generated and sunk. Do all users want the same kinds of things? For example, in WoW, you wouldn't see a level 1 guy looking for the same weapons as a level 50 guy. In a situation like that, if the level 50 (presumably) is getting a bigger chunk of the increased money supply, then his items will inflate much faster than the items that the level 1 guy is interested in.

It also depends on how equitably the increased money is distributed. If only relatively few characters have a ton of money, prices will likely be very unstable. Everyone may want to sell items for very high prices banking on the one dude with a ton of money strolling through and buying it, not caring that it takes a while to sell. Or it may be the case that if those "big fish" aren't biting, prices remain the same for a long time because even though the currency supply is bigger, the average Joe doesn't get any of it.

Also how often are items sold back and forth? Is everyone a solid "producer" or are there people whose net worth is likely to just keep going up and others who will remain at a fairly steady net worth?

To hazard one practical useful answer: You want a little bit of inflation, otherwise there is no impetus to spend your money and the economy stagnates. This is especially true if there is deflation. However, you do not want so much inflation that money earned today evaporates before it can be spent. Let's assume everyone's income increases at roughly the same percentage rate.

The exact rate would have to be dependent on how fast you expect people to spend their money. Are they making daily purchases or are they likely to save up over a long time to make a few big purchases? With a mixture of both, I would probably go with a figure close to the real world value of 1-2% a year.

Answer 4

The main reason for hyperinflation in online games is when players have more money than they can reasonably spend on NPC items. The result is that the only thing to do with their wealth is to buy rare items from other players. When everyone is in that situation, the prices for rare items will skyrocket because too many players with too much disposable income will outbid each other.

To counter this, make sure that there is always something expensive to buy from NPCs. There are two nice, self-regulating mechanics for this purpose:

1. the raffle. Have a raffle where one (1) item is given out once per day/week/month which can not be obtained in any other way. Sell the tickets for a fixed price, but allow players to buy as many tickets as they want to improve their chance of winning. The more disposable money there is around, the more tickets players will buy. So the actual price of the item will always adjust itself to the amount of disposable income. This technique was used by Kingdom Of Loathing to get rid of huge amounts of ingame currency which got into the game through an exploitable bug.
2. the rare item dealer. Have a bunch of unique items which can only be bought from an NPC. They can be bought again and again. However, there is a catch: Everytime a player buys them, the price increases by a certain percentage - for everyone! This is a specialized money sink to keep the richest of the richest players at bay.

Counterintuitively, it can help against inflation when you have a sink not just for money but also for items. Add a mechanic which makes it necessary to regularly replace equipment, even the ultra-rare stuff. You would expect that this reduces the supply while the demand increases and as a results the prices increase. But when items don't last forever but need to be replaced regularly, players won't get into the "more money than I can ever spend" phase because they have a cost of maintaining their equipment.

Answer 5

Inflation is really the difference between growth of an economy and growth of a money supply. If your economy grows and you dont print any more currency, your economy will deflate. The opposite is true for inflation. Zero inflation occurs when your printing of currency matches your economic growth. So as player skill level increases, or population increases, you need to print more money to match it.