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GDC Roundtable Report

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									Flying Scythe Monkey

GDC Round Table Report

Advanced MMOG Economies
Using Basic Economic Theory to Design MMOG Business Games

© 2005 Sam Lewis

FlyingScytheMonkey.com

11/27/2009

Overview.............................................................................................. 2 Basic Definitions.................................................................................. 3 What is the goal of a MMO economy? .................................................. 3 How do you know if you won? ............................................................. 4 Session 1 – Monetary Policy ............................................................... 5 How is cash created and destroyed in the real world? ........................... 5 How is cash created and destroyed in an MMO? .................................... 5 How can we design a self regulating money supply? ............................. 6 Can we regulate the money supply like the Fed? ................................... 7 Can we allow for player-to-player loans? .............................................. 8 Session 2 – Industrial Structure ........................................................ 8 How do we stop the elder crafter from dominating the market? ............. 8 How can we avoid killing demand? ..................................................... 10 Session 3 – Marketplace Structures ............................................... 11 Do we want prefect competition? ....................................................... 12 How do we get Oligopolies in a business game? .................................. 12 What other structures should be in a Business Game? ......................... 13 Conclusion ......................................................................................... 14

Advanced MMO Economies
Using Basic Economic Theory to Design MMO Business Games
Overview
This roundtable was a discussion about MMO economies and the design elements that support business games. The roundtable used classic economic principles and challenged the participants to think about how these principles can used to create challenging business games. The objective of the roundtable was for the participants to learn to think critically about how to incorporate more advanced economic elements into their game. Each session started with a definition of economics, and the objective of a real world economy. The participants where then asked to define the objective of a game economy, as well as the player’s goal, or victory condition. After that, each session explored a different aspect of business game design. The focus of each session was determined by the participants and the moderators used basic economic princi ples to guide the discussion.   Session 1 (March 9, 2005) – Monetary Policy/Role of Government Session 2 ( March 10, 2005) – Industrial Structure

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Session 3 (March 11, 2005) – Marketplace Structure

The sessions were well attended, and discussion was lively. The major issue (other than the noise problems) was that the subject was so broad that not all the issues could be discussed. For example the round table did not discuss tie-ins with real world economies (i.e. buying and selling in game assets with real world currencies), though many people expressed interest in discussing those issues. Excellent commentary on these issues can be found at http://terranova.blogs.com .

Basic Definitions
Each session started with some basic definitions  Economics – The study of how supply and demand allocates scarce goods and services in a society. Economics is typically broken into two fields of study o o Microeconomics – behavior and decision making of individual firms and consumers. Macroeconomics – behavior of the economy in the aggregate, focusing on nation production, inflation, unemployment and the role of government.

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Government – the governing authority. In MMO terms the government is the game developers. The NPCs within the game are their agents. Manufacturer – characters that make consumable and durable goods. In most games these are known as crafters. MMO Business Game – a game where the players are both consumer and producer of goods and services. Some markets might be served by NPC agents, but for this discussion an MMO business game is primarily a Play vs. Player game. Pareto Optimality – This is the standard that most economics use to measure the effectiveness of any economy. When an economy is Pareto Optimal then no redistribution of goods or services can make someone better off without making someone else worst off. Goal of Real World Economy – Achieve Pareto Optimality.

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What is the goal of a MMO economy? This was the first question we tackled in all sessions. This is the standard by which MMO economics should be judged.  Goal of MMO Economy – Support a “Fun” business game. The game involves the selling and buying of goods and services between players.

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The goal of a MMO economy is not the same as the goal for a real wo rld economy. Thus economic structures that are traditionally considered “bad” by economists (natural monopolies, government restrictions on free markets, oligopoly behaviors, stock fraud, etc.) might be good for a “fun” business game. For example a business game that allows you to build a ruthless monopoly that blows up competitor’s factories, commits stock swindles, defrauds the public and exploits workers can be as exciting as playing Halo. In the real world both the business and combat behaviors would land you in jail. How do you know if you won? Players need to know that they have won, or achieved some sort of goal, when playing a game. This is a fundamental principle of most games. The goal can be either defined within the game ( kill the most orcs) or by the players themselves (make the highest quality purple and chrome blaster possible). The participants discussed what the player goal or victory condition should be for an MMO business game. The three sessions came up with the following goal (in multiple variations) Relative Wealth – Players want to be on the top of the heap, therefore in a business game they want more cash/stuff than anyone else. This was expanded to include a comparison of assets, and liabilities, in effect a balance sheet.

How do you let others know you won? MMO communities are very status oriented. It is important that the players are able to let others know how successful they are in playing the game. How to display success to others was then discussed. Participants came up with the following solutions:  Conspicuous Consumption – Allow the players to purchase and display luxury goods (houses, clothing, pets, NPC followers). Many of these goods should not have an impact on actual game success. They just show others that the character has “money to burn”. Note that this solution not limited to displaying success in a business game. It is a typical means of displaying success in MMORPGs (I got this rubber chicken hat from this difficult quest, I am a level 65 Paladin, I can afford to dye my armor purple etc.). Balance Sheets/Net Worth statements – allow players to see the financial health of the character though some form of an income/balance sheet statement. This should be set up so that the player’s economic standing can “sli ced and diced” like a traditional leader board (I am the 2nd wealthiest flizz producer on the shard). Again this is similar to how MMORPG leader boards work.

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(see http://eq2players.station.sony.com/en/players_index.vm for an example).

Session 1 – Monetary Policy
The first session participants wanted to discuss macroeconomics, particularly how to control hyperinflation. We first assumed that an MMO business game needed to have players buying and selling with each other, as well as setting their own prices for goods and services. Having all prices fixed by the government (the developers), would not make for an interesting business game. To set the ground work, money was defined:  Money - Money greases the wheels of exchange and thus makes the whole economy more productive.

Most participants understood that money is not a commodity in itself. They also understood that the money supply needed to grow and contract based on the game economy's need for liquidity. Finally, they understood the strong relationship between growth in the money supply and inflation. Only Hyper-inflation and Depression were concerns. No one supported the idea of a fixed money supply. How is cash created and destroyed in the real world? A brief and simplistic explanation of how the government controls the money supply through manipulation of banking reserve requirement s was then given. When the Fed decides that the money supply is too large, reserve requirements are raised (indirectly), reducing the money supply, effectively destroying the excess cash. When the Fed wants the money supply to be larger, they lower the reserve requirements creating more cash. How is cash created and destroyed in an MMO? Cash is created through player-to-game exchanges. In an MMORPG this is done by doing quests, killing mobs, taking their stuff and selling it to NPC vendors, or by direct payment to the player for quest completion. It is not created by player-to-player exchanges. Cash is destroyed when players pay the game for a service or good. Examples are housing rents, purchases of items from an NPC, fines for carrying contraband goods, etc. The MMO term for such destruction of cash is a “drain”, so named because they drain cash from the world. The issue is that most drains are fixed in magnitude, and cash creation is in the hands of the players. Players, acting in their own self interest, will create enough cash to allow them to purchase goods and services from the NPCs and other players. It is easy to see how this will result in an inflow of cash that will overwhelm the fixed drains, resulting in an in flating, and eventually a hyper-inflated MMO economy and a poor business game.

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The example of Asheron Call’s hyper-inflation was discussed. There were no drains removing cash from the economy. Eventually the economy was flooded with cash and the in-game currency abandoned by the players. The players then started to use treasure chest keys as a substitute currency. The group noted that the attributes of these keys fit the definition of a good commodity currency. How can we design a self regulating money supply? The key is to develop cash drains that vary with the general price level in the game. As the economy heats up and inflation sets i n, money is destroyed at a faster rate. Some suggested systems to accomplish this were:  Transaction Tax – the game takes some fixed percentage of any player-to-player transaction. Fictionally this can be a broker fee, or a delivery fee, or just a business tax. As the price level for goods increase, more and more cash is destroyed. EQII broker fees are an example of this. Note that fixed charges for registering an item on a broker does not create a variable drain (SWG and WoW have fixed prices for putting goods up on a broker). Some form of a transaction tax is the most direct viable drain. It runs constantly and is very responsive to the general price level and intensity of economic activity. Auctions – A very interesting idea, though not directly tied to economic activity, it is tied to the general price levels in the game. Some limited game resource is periodically auctioned to the player community. As the money supply and price levels increase, the players will bid more for these scarce resources. As the money supply shrinks the price level falls and the players will not bid as much. Some example activities (based primarily on MMORPG game settings) include o Resource spawn leases – The location where raw resources are spawned are leased to the player for a limited time (North Slope drilling rights anyone?). Note that creating resources for the business game does not create money in the economy, as long as the NPCs do not purchase the raw materials. GM Special Events – the players can rent GM’s to run special events for their guild (hire Darth Vader for your guild party). Urban renewal – A set number of city blocks can be upgraded or maintained each game cycle. The players/guild with the highest bid will get their streets cleaned, and their “public services” upgraded. The other areas are allowed to decay. Fictionally this can be presented as bribing the Alderman to get the potholes fixed, or some variation of that theme.

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Protection Money – only a limited number of insurance policies against “natural” disasters are available. If you don’t get one, some of your assets might suffer an accident (a shame if that tank caught fire won’t it captain?) .

While dependant on the MMO game, it is easy to see how auctions could work, and provide cash drains that vary based o n the general price level.  State Run Gambling – the game allows for player characters to gamble their cash (with typical casino odds). The higher the general price level the more likely a player will “spin the wheel”. Even more indirect than the auction sc hemes, but a variable drain never-the-less. NPC Prices raise and fall – Some participants thought an algorithm could be made so that the prices that the game offered for player goods and services would vary based on the price level. We did not get to discuss the pros and cons of this in detail. It would require the developers to make decisions on how much cash was “enough”. [A personal note – I am philosophically not in favor of such direct intervention into a game’s market place.]

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Can we regulate the money supply like the Fed? We did discuss setting up banks, either by chartering player characters to create banks, or setting up an NPC bank. Here the government (developers) regulates reserve rates and enforce loan contracts, like in real life. Thus they directly control the size of the money supply in the same manner as the Fed. While many thought good game play could be achieved out of creating player chartered banks, we did not find a good solution to the fraud and embezzlement issues. A simple fraud example is that player A takes out a loan and then gives the money to player B (overly tipping a Star War’s dancer, to get the dancer’s attention was the specific example). Player A then cancels their account and the loan is in default. Player B can not be hel d accountable, and so the bank loses money. One solution, and one used on There, was suggested the next day. The loan is secured by collateral that is held in escrow. The borrower has use of the asset, but can not transfer it. If the loan is not repaid t hen the collateral is used to pay off the loan. If player-run banks accept player deposits and make loans (a requirement if we are to use bank reserves to control the money supply) then the embezzlement problem has to be solved as well. It is unlikely that a player can put up enough assets to cover embezzlement of all of the funds in a bank. No good solution to the embezzlement problem was given by the participants.

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It is possible for game run banks to loan money, accept deposits, and pay interest. The fraud problem is still there, but the game developers have direct control of the money supply by deciding how much money they will loan out. How difficult it would be for the developers to control the money supply in this way remains to be seen. Can we allow for player-to-player loans? We can allow for player to player loans if a collateral scheme is in place. All it really requires is for the developers to create escrow systems to hold the collateral.

Session 2 – Industrial Structure
In the second session, the participants wanted to deal with how goods and services are produced and brought to market. In the end this discussion revolved around natural monopolies and the structures that were needed to avoid them. We also discussed how to the keep an economy co nstantly producing so that it does not run out of steam. Of interesting note was the large number of participants who proposed heavy government intervention (production limitations, price floors and ceilings, limit the number of manufacturers, etc.) to so lve these problems. How do we stop the elder crafter from dominating the market ? In most MMOs the crafter (industrialist) creates goods through processing raw materials, and sub-components, though some game mechanic. There is a progression of goods that they can create, as they become more proficient. In an MMO, as the crafter produces more goods, they become capable of creating better quality versions of the good, and learn to make more valuable high-end goods. Their cost for manufacturing declines in some manner, normally through less wastage, or faster production times. This manufacturing processes results in an industrial structure that mimic those of natural monopolies –  Constantly Declining Marginal Costs – the cost of manufacturing one more item is less than the cost of manufacturing the pervious item. High Fixed Costs – the cost of getting into the business is very high. In MMORPG terms the cost of getting the skill of the crafter (human capital) up to competitive levels is high or very time consuming. First In Advantage – the first crafters in a market are able to sell goods at monopoly prices as they level up, lowering the cost

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of their investment in human capital as they advance. Other crafters coming into the market don’t have that advantage. This naturally results in the starting crafter not being able to compete with elder crafter. They have to invest more time and effort to get their skills and facilities up to standards of the elder crafter. Thus they face high fixed costs. Not surprisingly new players entering the game can not compete with established crafters and they don’t participate in the business game and so don’t have any fun. . The round table participants came up with the following solutions to this problem.  Comparative Advantage - this solution is to trust an economic principle to solve the problem. Under this principle the elder crafters will abandon the markets for low end goods, so that they can concentrate on producing higher profit high -end goods. If the market has enough demand for all of the high-end goods that can be produced by elder crafters, then this might work. However, in most cases, the market can not absorb all of the goods and so the elder crafters go to the lower end markets to make their profit. For example Docs in SWG regularly compete in the stim-B pack market, which are a low-end good that ought to support a lower end player, but because them is not enough demand for stim-C packs the Doctors compete in the stim -B market . Cap Quality – make it possible for a new crafter to compete with a elder crafter by capping the quality of the goods produced at a level that the new crafter can easily attain (the CDEF pistol made by a starting crafter is the same as the CDEF pistol made by an elder crafter). This will give more incentive to the elder crafter to compete in high end goods, leaving the low -end good market to the new crafter. Government purchases of low end goods –this solution with have the game NPCs purchase low end goods, providing a price floor for low end goods (hopefully at the cost of manufacturing). This way the new crafters have the fixed cost of getting into the business lowered, and they can get their skills up to par with the elder crafters quickly. The problem is if the crafter can make a profit they will use this mechanism to over produce goods, to sell to the government. This will artificially drive up the cost of raw materials and sub-components and create cash. Depending on how much profit a crafter can make selling items to the government, this might become the prime means of creating cash for the players. (This was the primary money making scheme in Asheron's Call for many years. Applesauce making is a fond memory for many AC crafters.)

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Faster crafting advancement for non-production – this solution attacks the problem from the other cost the player faces when entering the market, the actual time it takes to raise the skill levels of a starting crafter. The game gives the crafter additional experience for not producing a final product (farm subsidies anyone?). SWG does this. Have low end goods be subcomponents for high end goods – The new crafters become suppliers for the high end crafters, effectively becoming part of a vertically integrated industry. This was tried in SWG, but failed because the subcomponents made by masters are better than those made by non -masters. Substitute Goods - this solution has the lower quality good, manufactured by the new crafter, be a close substitute for the high quality version of the good. This will only w ork if the high quality version has a higher marginal cost to manufacture than the lower quality version. This can be done by requiring the high quality version use a high cost sub -component.

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How can we avoid killing demand? One of the major problems facing a player run MMO business game is market saturation. There are only so many consumers for pristine cedar bows. Once all of those players have one, the market vanishes. Each time a crafter makes a sell he destroys a custome r. If that customer can sell the good himself once he outgrows it, then the crafter kills not just one, but a chain of potential customers. These secondary markets for used goods can destroy the market for newly manufactured goods. The participants proposed the following solutions.  Attunable items – This solution has no real world analogy. What happens is that the item can have only one user. It is attuned the user though some in-game process and once attuned it can not be traded or sold. While it does not totally solve the problem it does remove competition from secondary markets. This solution is being used in EQII and some other games. Obsolescent though Monty Hall –In an adventuring oriented game, as the game ages, the developers keep adding bigger and bigger challenges for the players, and consequently the rewards become bigger and bigger. This is called the Monty Hall effect. In a business MMO the developers would constantly add new manufacturing items that are superior to the ones currently created. Having a large number of consumable items (potions, ammunition, bandages, fireworks, food, drink, clown makeup, etc.) is another variation of obsolescent. Decay – All items decay. This insures that the market is never saturated, because the items have to be replaced. Many player s dislike this method, but it is used with good effect in SWG and

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other games. An alternative is to make lots of consumables (food, drink, potions, ammunition, fireworks, etc).  Fashion/taste – this method is used to good effect by There and Second Life. Here customer tastes make last weeks items unfashionable and everyone has to replace their current set of items with whatever is hot. Limit Industrial production – government intervention by assigning quotas, or limiting production rights. Granting these rights can be done by direct quota, lottery, or though an auction. One interesting idea was to assign all players a quota and then let the players sell their quotas to each other. Another idea was to all players own a certain resource that only produced so much each turn and then let them trade those resources. Negative Faction (Don’t piss off the Wookies )- the act of manufacturing causes the player character to gain negative faction with an NPC group within the game. This group would retaliate against the player in some manner, once the negative faction is high enough. The example was making Wookie rugs. This would give a player character high negative faction with NPC Wookies, eventually ending with enraged Wookies burning the factory down.

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Session 3 – Marketplace Structures
The competitive landscape in the business game was the main topic of conversation for the 3 rd and final session. We used the attributes of a marketplace under prefect competition to guide this discussion.  Numerous Buyers and Sellers – Enough buyers and sellers to insure that no one person or firm can influence the price of a good. Homogeneity of Product – Goods offered by one seller are the same as the goods offered by another. Freedom of Entry and Exit – New competitors can enter the market at the same cost as the entry cost for current competitors. Conversely there are no major barriers to leave the market. Perfect Information – all buyers and sellers have the same information about the marketplace available to them. They all need to be well informed. No/Low Transaction costs – the cost of making a purchase is non-existent or low. If it exists, the transaction cost is the same regardless of which seller the customer chooses.

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Some versions of this list include Infinitely Divisible Goods as another required attribute for perfect competition. G iven the time constraints and the fact that currency solves this problem, we did not includ e that attribute for discussion. Do we want prefect competition? It would be possible to design a game that has prefect competition. However would this game be “fun” (the objective of a business game)? The answer is no. Under prefect competition all players are price takers. There are no opportunities for arbitrage, collusion, cornering the market, predatory pricing, dumping, and all those other fun robber baron business activities. However we do not a perfectly imperfect market. In that situation the economy is so inefficient that only the most driven players will participate. The key is to create market structures that will take enough of the burden off of the players to entice many of them to participate, without turning the game into a boring commodities trading game. In economic terms this means an oligopoly market structure. An oligopoly has a few large sellers, with a number of smaller competitors. They sell goods that are differentiated from one another (close substitutes). How do we get Oligopolies in a business game ? Creating imperfect markets is the simple answer to that question. To do this we need to do the following.  Numerous Buyers and few Sellers – we want numerous buyers and only a few sellers for a good at any one time. To do this we can fragment the marketplaces (SWG has no central clearing house for its Vendors carrying high end goods. EQII has online only vendors, giving players opportunities to offer goods when others are offline). Alternatively we can control the amount of goods available at any one time by making key component drops extremely rare, or limited. Close Substitutes – insure that goods are close substitutes for one another and that crafters have some means of product differentiation when they make an item. Letting crafters create the same goods in different colors is one simple solution. Having a sword that gives a +1 strength but a marginally lower DPS is another example of a close substitute. Imperfect Info – This allows for arbitrage and very interesting game behaviors. Many WoW traders play the market. They use a third party program to track average prices and buy up goods that are under-priced only to resell them at the average price. There players will work the payroll cycle. Thursday the prices for goods drop, as players find that they need some real world

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cash to make it through the rest of the week. Players buy up goods then and then resell them after payday for a nice profit. The players willing to spend the time have to have enough information to analyze the market and get an information advantage on their competitors.  Transaction Cost in time – Cost includes both in-game cash, but also how much time a player has to spend to complete the transaction. In SWG the cost of comparison shopping is very high, since there are no centralized market for high end goods. Players have to travel from vendor to vendor to see what is being offered. This makes advertising, one stop shopping mega malls, and location an important part of the business game (though it does frustrate some buyers). The trade -off is that if the transaction cost is too high the buyers will opt -out. Finding the right balance is critical. Moderate Cost of entry – This ties in with the 2 n d Session discussion on avoiding monopolies. However some means for moderate entry costs, that did not invalidate the solutions from the 2 nd session included – o Profession Tracks – make the players commit to a crafting class (arms manufacturer, potion maker, automobiles), and make changing between classes costly. Location Based Competition - if location is important for success (vendor stalls at transportation nexus, adve nturing supply shops near high traffic dungeons, Market stalls outside of a planetary starport), then new competitors into the market will either have to purchase a high cost location, or compete at a disadvantage. This disadvantage can be offset via advertising (SWG advertising droids directing customers around the starports to bargains off the main drag are common).

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Secure transactions are mandatory, even in Oligopoly. While piracy in Eve was brought up as fun game play (at least for the pirate), the par ticipants agreed that allowing players to steal from one another is not fun game play. What other structures should be in a Business Game? In an oligopoly environment we need to let players compete via marketing principles. Marketing has divided competit ive strategies into what is known as Kotler’s 4Ps. Note that these competitive strategies take advantage of the flawed structures that economist say will create oligopolies.  Product – competition via product differentiation. One way to do this is to have items have stats that are differently valued by one class of characters. For example, in EQ, a tunic that has +2 agility is highly valued by Rangers. The same tunic with +2

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wisdom is not as valued by the Rangers but is now highly valued by Clerics.  Place – Where the goods are offered for sale. As mentioned before locations near transportation nexus are prime real estate. Again centralized market places with listings of all goods for sale are good to lower transaction cost and get more buyers to participate. For example, the creation of the bazaar in EQ, made for viable business game. But doing so reduces the opportunity for competition based on the location of the seller. Promotion – Advertising pure and simple. Players do this all the time, (shouts and zone wide spam LFGing). Most of these are for services that can not be offered for sale via broker or auction house systems. Branding crafted goods with the crafter’s name, signage for stores, and other mechanism all allow the players to compete through promotion. Price – An easy one, but if there are price caps and floors because NPC vendors buy and sell the same items, then price competition is restricted. Heavy price competition is normally the last resort after Product, Place and Promotion competition options are exhausted. Note that the most competitive real world markets, such as grain, and crude oil, have virtually no promotional, product or place based competition.

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Conclusion
The round table sessions were very successful. The participants got engaged in analyzing MMO business games using economic principles. Many solutions for design problems became obvious once these principles where understood. The solutions for the specific design problems that the participants where interested in were:       The risk of Hyper-Inflation can be managed via viable cash drains directly or indirectly linked to the general price levels. We can create a loan structure which will allow players to borrow cash from each other. Elder crafter domination can be solved by ins uring that the industrial structure is not one of natural monopoly. Market saturation can be avoided by obsolescent Market structures that lead to Oligopolies make good business games. Competitive business games should support tradition means of marketing products.

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Going forward, using economic theory of public goods, welfare economics, financial intuitions, etc. should provide solutions to design issues that are not directly connected to a business game.

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