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Inequality and competition in a digital economy: a case study

Summary:
Pokémon Go is an economy in miniature. There is exchange: players trade Pokémons and swap gifts. There is scarcity: the balls required to catch Pokémons are scarce, as is Pokémon storage capacity and other items in the game. There is production: through various activities, such as walking a Pokémon egg, or leaving a Pokémon in a gym, players can produce new Pokémon, or earn tokens. There is status seeking and signaling: high rank players parade their skill by wearing special clothing, and displaying their game level. There are even exports and imports. Pokémon Go imports dollars from the real life economy, exporting in exchange game tokens, and the enjoyment and entertainment players get from using those tokens. Yet Pokémon Go differs from the real-world economy in two crucial

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Pokémon Go is an economy in miniature. There is exchange: players trade Pokémons and swap gifts. There is scarcity: the balls required to catch Pokémons are scarce, as is Pokémon storage capacity and other items in the game. There is production: through various activities, such as walking a Pokémon egg, or leaving a Pokémon in a gym, players can produce new Pokémon, or earn tokens. There is status seeking and signaling: high rank players parade their skill by wearing special clothing, and displaying their game level. There are even exports and imports. Pokémon Go imports dollars from the real life economy, exporting in exchange game tokens, and the enjoyment and entertainment players get from using those tokens.

Yet Pokémon Go differs from the real-world economy in two crucial respects. First, prices, the distribution of initial endowments, and all rules are determined by the game manufacturer, Niantic, which acts as an omnipotent “social planner”.  Second, anyone who does not like the rules of the game is free to leave. The possibility of exit gives power to players: because more players=more revenue, the social planner has a strong incentive to set rules that keep players happy. Thus the rules that govern the Pokémon Go economy provide insight into what type of economic rules people would choose, if they actually had power to influence the social planner’s decisions in real life. 

One of the most notable features of the Pokémon Go economy is the number of rules that limit the extent of inequality. Players earn tokens by leaving their Pokémon in gyms – up to a maximum of 50 tokens a day. Players gain status by achieving higher levels – but the game is structured so that the overwhelming majority of players are somewhere between level 30 and level 40. Players gain the ability to defeat other players in battle by powering up stronger Pokémon – but each Pokémon’s maximum combat power is capped too.

But so what? Pokémon Go is just a game, after all.

Yes, Pokémon Go is a game - and in gaming the excitement comes from the unpredictability of the outcome: you might win, you might lose. Take away that uncertainty, and the game becomes grinding - doing the same tasks over and over again just to earn tokens or stardust or experience points. 

Yet for the outcome of, say, a battle between two players to be uncertain, the players must be at least somewhat evenly matched. If the best players are able to grab all of the resources, and become ever more powerful, the game won't be any fun for the less skilled or experienced players. Defeat would be entirely predictable and, therefore, boring. Thus a good game is a competitive game.

Economics also preaches the virtues of competition. A competitive economy is "efficient": no one can be made better off without making someone else worse off. Moreover attempts to create a more just and equal society through policies such as rent controls or minimum wages can backfire, making the people they were intended to help worse off. The best way to solve distributional problems like inequality and poverty is to create an appropriately levelled playing field and set economic agents free to pursue their own interests. These are the "fundamental theorem of welfare economics."

Yet competition only leads to these desirable outcomes under specific conditions, known as "perfect competition". There are many buyers and sellers. Everyone is fully informed about the price and quality of the goods they are purchasing. No one buyer or seller has market power, that is, the ability to influence prices. 

But perfect competition is a fragile flower. Even if a game starts off being competitive, foresighted successful players will use their winnings to gain competitive advantage in future games. Indeed, the possibility of improving one's position by winning is an intrinsic part of the appeal of the game - if there were no rewards for winning, there would be no point in playing. But if successful players can "power up" indefinitely, they will eventually become unbeatable. For the unsuccessful ones the game will become, at best, boring; at worst, a desperate struggle for existence.

The Pokémon Go "social planner" restricts inequality and preserves competition in part because they can, and in part because it's profitable. Niantic generates revenue from Pokémon Go through in-game purchases, and (I assume) by selling the location data the game generates. Unless successful players are vastly more profitable on a per-player basis than the average (which seems unlikely), Pokémon Go's profitability rests on the ability of the game to attract and retain as many players as possible. Hence the game is designed to make the typical player happy. [Update: apparently a relatively small number of players who make lots of in-game purchases, known as "whales", are responsible for the bulk of gaming company's profits. However these players' are not always the most successful players, and their enjoyment of the game rests on having other players to play with. Hence Niantic still has a strong incentive to make the game enjoyable for the average player

Social planners in real life are also concerned with the happiness of the typical person. Governments want to get re-elected, and to get re-elected, they need to keep voters on-side. However their incentives to work in the interests of the average citizen are muted by the fact that many average citizens do not or cannot vote, some voters' votes have little influence on electoral outcomes, elections happen infrequently and, above all, voters cannot easily leave the game.  Even if the choice is between an incompetent candidate and a criminal one, all a voter can do is pick the lesser of two evils, or let other voters decide the election outcome. 

Ticking a ballot box is not as powerful as voting with one's feet. In a modern economy, the power of exit belongs not to people but to capital - to firms who can relocate if they are not given favourable tax treatment, or to the ultra-rich who can move their money off-shore.  The kinds of radical constraints on inequality embedded in games like Pokémon Go are unacceptable to owners of capital. Through the threat of exit, they are able to pressure governments to make the tax system "more competitive" - the standard euphemism for lowering corporate tax rates (see, for example, here; to read more, see here). And so the successful are able to gain more resources, and more power. The playing field gradually becomes less level, and perfect competition, where players are at least somewhat evenly matched, withers away.

So don't criticize those who minimize their engagement with the real world, and devote their energies to virtual reality. They're opting for competition, equality, and a place where skill is rewarded and everyone has a chance of winning. 

Frances Woolley
I am a Professor of Economics at Carleton University, where I have taught since 1990. My research centres on families and public policy. My most-cited work is on modelling family-decision making, measuring inequality within the household, feminist economics, and tax-benefit policy towards families. I hold a BA from Simon Fraser University, an MA from Queen’s, and completed my doctorate at the London School of Economics, under the supervision of Tony Atkinson.

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