It’s The Economy, Stupid! (But Which One?)

Thursday, September 18, 2008 Thursday, September 18, 2008

That’s right. I believe there are two separate economies at play within Second Life. Sure, there is a single monetary system based on the friendly Linden Dollar, but it’s clearly being used in two ways.

The first way is as one might suspect, casual in-world transactions between avatars. What’s so unique about that, you ask? It’s the magnitude of the transactions: they are all small. For example, a pair of virtual pants might cost 299L – approximately $1 in “real” funds. The pants are so cheap because they are virtual and perhaps have less utility than “real” pants.

And so it goes. Many things are priced at this microscopic scale. Cars, boats and other vehicles are available for a dollar or two. Good ones may cost you $8. Oops, I mean 2000L . Two Thousand sounds a lot bigger than 8, doesn’t it? The Linden Dollar has a small intrinsic value because it is addressing a micro-economy. Goods and services are bought and sold, but their prices are microscopic compared to real world rates.

Many residents allocate a small portion of their real dollars towards virtual activities and expect to have a full and fun virtual existence. They can, because there are virtual business owners who sell them goods and services at a micro-economy rate. Pants are indeed for sale at 299L. Who would buy them if they were priced at the shocking rate of 24,000L, equivalent to the price of a fancy real life pair?

But then there is the “other” economy. The one where the real world intrudes on the micro-economy. Some real-world businesses have thought it possible to make money in Second Life. By “make money”, they mean “make money at real-world rates”. Is this possible? Perhaps, but it’s going to be difficult because the majority of the SL economy is at micro-economy rates. It’s like selling those pants for 24,000L, and expecting to sell a lot of them, too.

Real world companies thought they could get around this conundrum by selling atomic goods in the virtual world: buy a real PC or shoes at a virtual store and have them show up at your door. I don’t think that approach worked out very well. Perhaps it’s because of the collision of economies.

Problems do occur when the two economies collide. For example, if someone is making their entire RL income via SL, they have a right to charge RL rates. However, those expecting the micro-economy are in for a factor 250x shock. But remember, the seller is not overpriced, and the buyer is not too cheap. They are simply nodes of the two economies crossing paths. They should keep going and look for buyers and sellers within their own economy.

I know several business owners who recognize this principle and explicitly price their goods and services towards one economy or the other. They would feel uncomfortable pricing their items any other way. Neither economy is wrong, they are simply different. What’s the moral of this story? When you are selling in SL you must decide which economy you wish to belong to. Then set your prices appropriately.


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