A synthetic economy is an economy existing in a virtual persistent world on the Internet, such as a MUD or massively multiplayer role-playing game. The largest synthetic economies are currently found in massively multiplayer online roleplaying games (MMORPGs), such as EverQuest, Ultima Online, Dark Age of Camelot, and Lineage. Synthetic economies also exist in life simulation games such as The Sims Online. An economy can be said to exist in these virtual worlds whenever the following five conditions are met:

1. Persistence – The software maintains a record of the state of the world, regardless of whether or not anyone is using it.
2. Scarcity – Users must expend time, money, or some other resource to obtain some of the desirable goods and services in the synthetic world.
3. Specialization – Users must be able to obtain at least some of the goods and services they desire from other users.
4. Trade – Users must be able to transfer goods and services to and from other users.
5. Property Rights – The world must record that a given good or service belongs to a certain user, and the code must allow that user to dispose of the good or service according to whim.

These conditions embed users in an environment characterized by choice under scarcity, specialization of skills and production, and gains from trade with other users. Choice, scarcity, specialization, and gains from trade are at the core of the class of problems studied by contemporary economics.

Synthetic economies perform useful resource-allocation and entertainment roles within MUDs. They also interact with the Earth economy. US dollar markets for synthetic-economy goods, currency, and services may be observed at online auction sites such as eBay (search "Ultima Online", or "DAoC" for Dark Age of Dark Age of Camelot) and other auction sites. Some game developers claim that such auctioning of virtual items for real-world money is in violation of the end user's license, for example eBay has dropped EverQuest auctions at Sony Online Entertainment's request.

According to standard conceptions of economic value (see the subjective theory of value), the goods and services of synthetic economies are endowed with real value. The value of a good is determined by its users, and is measured by their willingness to give up resources to obtain it. MUD users are willing to devote both time and Earth currency to obtaining synthetic goods, making these digital assets as real as any assets on Earth.

The largest synthetic economy is Lineage based in South Korea, claiming to have four millions users. The location of its online market, if it exists, is unknown.

External links

• Castronova, Edward. "Virtual Worlds: A First Account of Market and Society on the Cyberian Frontier," CESifo Working Paper No. 618, December 2001.
• Castronova, Edward. "On Virtual Economies," CESifo Working Paper Series No. 752, July 2002.
• Castronova, Edward. "The Price of 'Man' and 'Woman': A Hedonic Pricing Model of Avatar Attributes in a Synthethic World," CESifo Working Paper Series No. 957, June 2003.