In this blog post, we explore how the economic theory of perfect competition operates in virtual worlds, using an in-game auction house as an intriguing case study.
I happened to take an introductory economics course during my college years. It was an opportunity to learn about the broad concepts of economics and various theories. Although economics initially felt somewhat difficult and complex, encountering various theories made me realize how closely it connects to our daily lives. Among the many theories, one particularly resonated with me: the perfectly competitive market.
Back then, I often found myself agonizing over purchases. I always had to carefully consider whether buying an item here was economical. Why did I agonize over this? The reason was simple: prices weren’t uniform, so I couldn’t be sure where buying would be most advantageous. Even identical items varied in price between stores and online retailers, and sometimes even between different shops on the same street. Each time, I wondered, “Why is that?” but couldn’t find a clear answer. Then, while taking an introductory economics course, I encountered the theory of perfect competition, and that theory provided one answer to my dilemma.
Economists created simplified models through various assumptions to understand complex economic structures. One such simplification is the perfect competition market. A perfect competition market assumes a large number of market participants, free entry and exit, and that all participants possess complete market information and product knowledge. Furthermore, it is believed that when each market participant has negligible influence on the market as a whole and the goods traded are homogeneous, prices are formed through perfect competition. In this ideal market, the law of one price holds, and price deviations disappear.
While a theoretically perfect competitive market is hard to find in the real world, I decided to apply this concept to an auction house within a game. The in-game auction house is a space where goods are traded, with each player acting as both seller and buyer. Within the game, the auction house possesses several unique characteristics distinct from reality.
First, the in-game auction house features information symmetry. In reality, purchasing product A may result in price differences based on an individual’s access to information, but within the game, all players have access to the same information. This causes prices to converge at a specific point, enabling the law of one price to apply. Second, the in-game market is a market driven by individuals. Within the game, each player participates as an independent economic agent, with free entry and exit from the market. This realizes one of the key characteristics of a perfectly competitive market: free market entry and exit.
Through this analysis, we found that the in-game auction house possesses the characteristics of a perfectly competitive market. However, even if the in-game auction house approximates a perfectly competitive market, it cannot be considered a perfect market. Like the real world, the in-game market also has limitations and problems. For example, because in-game currency has a different value system than real-world currency, cash payments can significantly impact the in-game economy. This creates a situation far removed from the ideal conditions of a perfectly competitive market.
Furthermore, game patches can also cause major shifts in the market. When a new patch is applied, items that were previously worthless can suddenly become highly valuable, or conversely, items that were highly valued can instantly become worthless. These changes mean that price formation in the in-game market is influenced by external factors, which conflicts with the characteristics of a perfectly competitive market.
Several approaches can be proposed to address these limitations of the in-game market. First, regulating cash transactions is necessary to protect the value of in-game currency. Limiting the inflow of cash transactions is crucial to reduce the disparity in currency value with the real world and maintain market order. Second, analyzing market volatility by observing the intervals between patches is necessary. Patches signify game development and inevitably bring market changes. However, predicting and managing this volatility could help build a more stable in-game economy.
Through the game’s auction house, I realized that the theories I learned in economics don’t just stay in books; they can be applied to various situations we encounter daily. Although these events occur within the virtual space of a game, similar laws and principles to those of the real economy operate within it. This experience deepened my understanding of the practicality and importance of economics, teaching me that the insights provided by perfect competition markets can be applied to both the real world and the virtual world.
