The Design of Online Economies

Part 2: NPC Merchants

As I discussed in Part I: The Role of Currency, standardized currency reduces the transactional friction between different economic participants: players (PCs) and non-player characters (NPCs). This article addresses the function (and ramifications) of NPC merchants in an online economy.

NPC Merchants

Traditionally we view NPC merchants as "that guy that buys the crap I loot of monsters and sells me better swords", but that the shopkeeper form is just one specific type of merchant. An NPC merchant is really any game entity that, when given an item, performs a service or returns a good. For example, quest giver NPCs -- who may take only a single type of item ("quest token") and give something back in return -- are a type of NPC merchant.

Either way, the common element is that a non-player character takes tangible money and/or goods from a player and converts it to something else (money or another good). And while the most common examples are, in fact, shopkeepers, I feel obligated to mention the whole quest giver thing just so to emphasize that shopkeepers aren't the only form of NPC merchant.

Currency and the Merchant

For all intents and purposes it is impractical to implement merchants without a standardized currency. They lack the intelligence to barter for items, which means designers must fall back to a predetermined menu and price list (except for NPC quest givers, who can probably just have a hardcoded exchange table).

Merchants serve two useful first-order functions. First, they provide a handy clearinghouse for players selling acquired loot and old items -- in the process converting items to currency while removing old items from the economy. The second function is to offer goods at a known and (presumably) consistent cost, bootstrapping the economy and setting price constraints. For example, shopkeepers are a guaranteed market, which means that if you expend a lot of effort to make or harvest something, you'll get some financial reward for it (assuming most NPC merchants aren't picky about what they buy and sell).

It's interesting to note that NPC merchants and standardized currency reference each other cyclically. If you remove one, then the other must be removed, but if you remove both at once, you can still have a functional economy so long as any resultant gaps are filled (e.g. items and services that were provided solely by merchants are now available through other means).

Merchant as Transformer

In a virtual economy with currency and merchants, the latter play the vital role of transformers. They transform items into currency and back, usually with an associated friction cost (you buy a long sword for ten gold pieces but can only sell it back for five).

Transformation has a lot of handy side effects:

  • players can easily convert items to cash and back, which increases player convenience and "lubricates" the economy
  • unused items don't pollute the world, instead they are converted to relatively inert and compressible cash
  • money does not lie fallow, it can easily be converted into items of value for a particular player
  • items that one player may find useless can propagate to other players using the merchant as a vector (assuming the merchant resells the item)

In essence, merchants make a currency system practical by providing the transformation facility and increasing economic efficiency. By purchasing items (and taking them out of general circulation), item pollution is reduced, staving off deleterious side effects such as a constant shift of high powered items to lower level characters.

Merchant as Pricing Regulators

Merchants also fulfill the important role of pricing regulators in a player driven economy. If players are an important part of the economic structure, by creating, selling, and buying goods and services between each other, then there is always the opportunity for "abuse" when players with control over a particular economic facet use it as leverage against other players.

If the only way to acquire a Steel Bastard Sword is to purchase it from a smith, and if the Steel Bastard Sword is simply the best weapon for a given group of players, then smiths that collude with each other can drive the price through the roof, selling an item that cost, say, one gold piece for twenty gold pieces. NPC merchants can prevent such cartels, much to the ire of PCs that engage in crafts and dislike competing "with the computer". If an NPC merchant will sell you a functional equivalent to the Steel Bastard Sword for only three gold pieces, then a price ceiling is established. The smiths will have to drop their prices to, say, five gold pieces in an attempt to look reasonable, all the while cursing the meddling game designers.

Similarly, a price floor can be established, although this is much more rare (it is usually much harder for buyers to organize than it is for sellers).

That said, price regulation is more of a market convenience than necessity (although players at the mercy of a monopoly may feel otherwise), because most monopolies are unstable: it's self-defeating to enforce prices that no one can afford, and all it takes is one member of the monopoly to undercut everyone else for things to start crumbling. And in a large enough on-line economy, there will come a point where free-market properties end up dictating the fair price for goods -- short of threats from those with an investment in the status quo (cartels, monopolies, guilds, unions, governments, and their ilk).

Merchant as Substitute/Initial Market

In an online virtual world where PCs are expected to create, buy, and sell the bulk of services and merchandise, there is a pronounced chicken-and-egg problem when the world first launches. A "fresh" world has no one with the requisite skills or items to get the economy rolling. The only source of "stuff" is from the environment, and if a player desires a specific advanced item and no PC crafter is able to make that item, then he's out of luck (and very frustrated).

NPC merchants can ameliorate this problem both by priming the economic pump and providing a substitute market. NPCs can act as the original buyers and sellers in an economy, thereby reducing the grid lock between relatively poor and powerless players trying to establish a primitive economy.

In addition, by providing immediate access to goods (at relatively high prices), NPC merchants allows PCs to skip much of the tedious delay waiting for the economy to ramp up. Instead of waiting a week for Bob the Smith to make a steel helmet, Will the Warrior can buy a (more expensive, lower quality) steel helmet from a merchant right away. Later, when Bob has mastered making steel helmets, his goods should naturally supplant those of the NPC merchants.

In the worst case, scarcity due to a nascent economy can be devastating. If all food is available only from PC bakers, butchers, and farmers, then woe to the poor wizard starving to death because no one is on-line that can sell him food. When a desired market is uncooperative or simply non-existent, NPC merchants act as an inefficient substitute market to keep things limping along.

Without this substitute market a population may never attain the critical mass necessary to found a proper PC-driven economy.

Modeling Local Supply and Demand

One of the problems with virtual economies is that there is a constant temptation to "be more like the real world". This is a dangerous path, because while the virtual and real worlds feel similar they often have stark differences.

One such common suggestion is to "model local supply and demand". The intent is to look at commonly harvested or acquired local items and attempt to set prices and availability accordingly, providing a sense of realism to the setting. For example, a town near a copper mine may suffer from a glut of copper ore, and thus the local merchants may not give anything for copper ore.

This makes sense, but it really, really pisses off players who, while understanding and maybe even agreeing with the logic, don't appreciate it. Instead they'll curse that so much effort has been spent mining, and now they have a bunch of worthless ore -- unless they're willing to travel across the continent to a copper poor area and sell it there. This has a certain appeal, but unfortunately it's grossly tedious.

The opposite situation can also occur. If a town has the misfortune of no local bakers, butchers, farmers, or ranchers, players may find that food is extremely scarce, and prices sky rocket accordingly. Suddenly low level players can't afford dinner, and even high level players grouse that their adventuring is ruined because all their fat loot is being converted into food just to stay alive. Yes, this is realistic (cf. the apocryphal stories of California gold rush miners paying a dollar for an egg), but again, it's not particularly fun.

All that said, modeling local supply and demand might be feasible in a world where a large economy gives rise to arbitrage specialists who eventually equalize the various markets. But this requires a lot of things happening, including a set of emergent behaviour that the designers may predict but cannot guarantee.

Summary

An online world that provides a sanctioned currency requires some kind of vehicle to transform items to currency and back. NPC merchants provide this ability, along with secondary benefits such as economic stabilization. While NPC merchants are not strictly necessary, they can smooth out the operation of an online world by filling in for PCs, regulating prices, and providing vital resources on demand.

If you create an economy with no standardized currency, NPC merchants are largely irrelevant since the economy will automatically transition to some form of barter system.

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