Mannconomics: You Gooze(x), You Lose
[WARNING: This article contains ideas that may only interest people with elbow patches on their jackets. It often grossly oversimplifies esoteric concepts. As is usually the case when I'm grossly oversimplifying things, I don't care.]
Once upon a time, waaaay back in July 2006, there was a man. This man was upset with the current landscape of the used games market: he could either sell them for a lot of hassle but little money, or he could hope and pray that he could find someone to trade with. Neither of these were ideal. So he came up with an idea to facilitate game exchanges between like-minded gamers that avoided the normal downsides of other trading options. Thus, Goozex was born.
The man looked at his creation and saw that it was good. Trades were happening quickly. Concurrent trades were up to over 5,000. People seemed happy with the service, and he had a good system of monetization. It was, as Martha Stewart may have proclaimed, A Good Thing™.
But the man got greedy.
He and the other operators at Goozex made a series of seemingly logical but economically ill-informed decisions. Within a couple short years, the whole house of cards collapsed. Through ignorance, negligence, or maybe plain old-fashioned greed, Goozex took a good idea and killed it. The company inflated its currency, capped the prices that inflation needed to change, and have not remedied their situation. What was once a vibrant trading community is a ghost town of tumbleweeds and EA Sports titles from 2005. And the man is left to wonder where it all went wrong.
Goozex was created in part to avoid the difficulty of hunting for a suitable trade for your game — in other words, to bypass the normal barter system. A barter system is a system in which goods are traded directly for other goods. This has some obvious shortcomings, the main one being that the person who has what I want may not want what I have to trade.
Goozex created a similar setup using a medium of exchange creatively titled “Goozex Points.” A user could send their game to someone who requested it, thereby earning points, which then enabled them to request their own game from someone else. Instead of having to find the one lunatic willing to trade you their copy of Gears of War for your copy of Aquaman 64, you can simply trade with anyone who wants what you have, then purchase anything else that you want. If the price is right.
So far, so good. Games rotated in and out pretty quickly, and the queues moved. Goozex seemed to have a pretty good pricing mechanism, with the newest games going for 1,000 points (a real-world $50 equivalent) and the cheapest games going for 100 points ($5). Ideally buyers and sellers would set their own prices, but an active and well-written pricing algorithm seemed a reasonable and lower programming-time option.
Eventually Goozex seemed to realize that it wasn't making enough money off of trades to make maintaining the site worth their while. By my math the company was only pulling in around $180,000 a year*, and after paying taxes, credit card fees, server/bandwidth fees, etc. there's not much left. So it needed a better way to monetize traffic on the site. It needed more money. So, in 2009, it began allowing users to directly buy points. This decision had some very predictable and very deleterious effects. Namely: inflation.
Inflation is simply an increase in currency (e.g. Goozex Points) without a corresponding increase in wealth† (e.g. actual video games). Inflation has a great many effects, a few of which are good but most of which are very bad. You may hear the aforementioned brainiacs in elbow patches debate this, but they are talking about very slow, steady inflation in the order of 1%; not what we see in Goozex's example‡. Still, once the initial dust cleared from this currency move and things re-normalized, it probably wouldn't be a lot worse except for some disgruntled users who thought they’d had a lot of valuable points beforehand.
That is, assuming prices could adjust. But Goozex didn't let them.
Goozex, holding all the control over prices, held prices where they were. To this day, new games are priced at 1,000 points. Now, price controls have a long and storied history in economics, and unlike inflation, are thought by pretty much everyone to be a terrible idea. Whether it's the oil embargo of '73 or Rome's Edict on Maximum Prices, price controls create shortages. If a good (say, our Goozex game) is worth 1/10th of the economy, but a person can only get 1/20th of the economy's medium of exchange for it, that person is going to choose not to sell the good. It wouldn’t be worth it.
Goozex, which has (perhaps foolishly) been kind enough to publicly post its concurrent trades since its inception, has provided a very clear window into the aftermath of their inflation/price control death spiral. Overall trades, which were well above 5,000 in 2009, dropped by more than half to 2,400 in late 2010 and as of the time of this writing are sitting at 835. Anecdotal evidence bears out the shortage, with fora across the internet complaining about the inability to get games, especially newer (read: higher priced) titles.
I myself have witnessed the drop. One game in particular that I had on my queue for a long time is a sad-but-funny example of the weird situations this scenario can create. Alice: Madness Returns for the PS3 "launched" at Goozex on June 30th, 2011 for 1000 points. It is still 1,000 points, 16 months later. In that 16 months it has been traded a mere 65 times, and ahead of me on the queue there are 152 other people. At that rate, it would take me an additional 37 months to receive the game. At a "$50" rate. The actual market, however, is pricing used copies at a mere $13 and brand-new copies for $20. PC versions have been seen on Steam sales several times for a mere $5.
There is a fix to an inflated system, of course: deflation. But to the site owners, it's a messy proposition. The only way to deflate the currency in Goozex's case is to remove points from the system without removing games. The only legitimate ways to do this are to buy back points from users, or to give them a site-bought game instead. To Goozex's credit, it did try a small run with the Amazon exchange, but it was far too little, far too late.
Better would have been to have found other ways to monetize the site. It could be ad revenue, becoming a sales source themselves, selling "perks" like cutting to the front of a game queue, or a combination of several things. All have their own trade-offs, of course, but the economy-ending spiral of inflation and price controls was the worst possible outcome. It may even be possible that their original model is sustainable, given a conservative enough approach.
Economics, at its simplest definition, is the study of scarce resources. Unfortunately, in practice it is anything but simple. The real world has a tendency to contain far too many variables to ever properly isolate into a concrete scientific analysis. Modern multiplayer and interconnected video game systems, on the other hand, often contain very closed and controlled worlds and an ability to quickly aggregate a tremendous amount of data. This is a boon to anyone who likes to get their nerd on.
Perhaps some companies think that their virtual systems are more controllable or somehow don't follow the same rules. Some (like Valve) certainly do, but at this point there is still plenty of instructional fodder for those with patched elbows. Goozex, much to the chagrin of both its owners and gamers writ large, falls into the instructional category. It still stands today as an example of the dangers of inflation and price controls run amok in a system.
[size=9]*5,000 trades happening concurrently. Each trade lasted roughly 10 days. So roughly 180,000 trades a year. At a dollar net per trade (Goozex's fee), the math is pretty easy.[/size]
[size=9]†To use a simplistic example, suppose all of Goozex was ten people, each of whom had traded in a single newly-released game for 1,000 points. So the economy of Goozex is ten games, with a total currency of 10,000 points. Each game is 1/10th of the economy. But now, suppose Goozex sells an additional 10,000 points to people who haven't put any actual wealth (e.g. games) into the economy. The currency count of the economy now stands at 20,000 points, but each game is still 1/10th of the economy. Remember, the points are just a currency and have no inherent economic value. Since the actual wealth of the economy (still games) hasn't increased but the currency has, each game is worth 2,000 units of currency. [/size]
[size=9]‡No one knows for sure how much Goozex Points have been inflated over the years, but since points have been for sale for years and have often been for sale at half-price ($25 for 1,000 points), one can assume it is quite severe. The data we do have, as we will see momentarily, bears this out.[/size]