Now that we have a better understanding of ``Just what is a faction?'' (answer: formalized grouping enforced by code), we can look into ``What benefits do player-based factions bring, and what are their costs?'', and yes it is important to bear in mind there are costs. In essence their inclusion engenders and cements the social bonds. This can be accomplished by shared interest, communal resources, or purely the honour afforded by association. A PUG or trade guild aren't the only examples of the first but they are the most common. Most ``guilds'' or ``clans'' one finds in the various Mud's exist as examplars of the second (they help you get loot by regularly organizing raids and grinds and will buff you up from the vault if you don't have the ``proper'' gear) and to facilitate the first. Looking for someone to team up with you for that Kill 10 Rats quest? There's bound to be someone else with that same quest who can join you. Many guilds, if they cannot create a self-contained economy by recruiting every trade profession imaginable, will try to corner one particular market to become the best or most profitable bakers or weaponsmiths, etc. As a faction rises in popularity it will develop a reputation all its own. Some players will even perceive that as a short-hand or stereotype for all her members. One faction is peopled only by scoundrels, but another has nice folks. Here recruitment might simply be a matter of being associated with that honour or that glory. Look at me, everyone! I'm part of the winning team!
When people feel they belong to a social group they tend to feel invested in the virtual world. When people are invested, they are more like to be retained within your virtual world rather than to seek greener pastures elsewhere. So naturally you will be tempted then to identify all the possible reasons for creating a faction, and all the possible functions and perquisites, in an effort to offer the most compelling social environment possible. Here we come to one of the great costs. Time spent analyzing and designing this stuff cannot be spent analyzing and designing other things. If player-based factions are the very core of your Mud then you are on the right track, but if they are not, if they are fairly ancillary, you may have wasted considerable time. The second great cost is that once something is designed then it must be implemented. It cannot be left ``unsaid'' or else your ultimate produce is incomplete. Since all pieces of your Mud exist to butress and support your vision, if any one piece is removed the result suffers horribly. You narrative and fighting and exploration may all be the best there ever was, but w/o this missing piece you're no better than second-best; possibly much worse. It is true your Mud is not complete unless there is nothing left to remove, a corollary is ``The stuff that survives the culling must be implemented.'' It would be like letting characters swim the sea while in plate armour because you couldn't get around to implementing that weight or density or that buoyancy stuff yet. It shocks the mind, breaks immersion, and smacks of intellectually laziness. A third cost is risked if one makes factions self-contained. This bears elaboration.
If your virtual world permits factions to become entirely self-contained, that is to say if once I join a faction then I no longer need to interact with any other faction or even the game world itself (outside of questing and raiding, I mean), if once I join a faction then I can rely on them for all my needs (leveling, gear, advice, etc.), then you have successfully externalized all social commitment. A proper design would have social commitment, certainly, but it would be spread over multiple factions. See, if I spend 100% of my time within Clan Uberguild, if I only spend time in faction chat and only shop and trade with my guildies and only ever go on raids or grinds with my guildies, then I no longer have any commitment to your virutal world at all, and my association is tenuous at best. This situation makes it incredibly easy for entire groups of people, dozens and even hundreds of people, to just cloe up shop and move on to some other virtual world. Believe me, no matter how successful your virtual world may be, if 500 people, no matter how misanthropic or shy they may be, just suddenly pack up and clear out then your virtual world will suffer horribly. This situation must be avoided. Fortunately there is prevention.
Sociologists have noted there are ``weak bonds'' and ``strong bonds'' between people at various interfaces. Along traditional lines, I am strongly connected to my parents, my siblings, and my offspring. I am still connected, but not as stringly, to my grandparents and cousins. I am similarly connected to my friends, but not quite so keenly connected to their family or my coworkers. If we follow the logic out, eventually we don't give a shit about starving people even if we can support them for just 50¢/day (that's less than the price of a cup of coffee!). In the ideal model these form concentric circles radiating out from oneself toward The Known Universe, with distance indicating the degree of care, which is how the bond is measured as stronger or weaker than other bonds.
Demographers look at social networks. I'm connected to Fred by virtue of employment. The postal carrier delivers my mail. I'm only half-joking when I say we should bomb Japan because they built my minivan and so I'd be screwed w/o them. They also speak of weak and strong connections, and their notion is very similar to the above degrees of separation. I should deal fairly with the friend of my friend, because if I treat this person unfairly it may come back to me via reducing relations with my friend.
There is nothing at all contradictory between the two ideas. I look at them combined, similar to the particle-wave duality of light. Instead of a single node with various ripples and waves, imagine casting a handful of pebbles into a pond, each radiating out their own influences and each mutually communicating with the others via specific edges of connectivity.
Keeping that model in one's mind, now one can consider the impacts of various design decisions WRT factions, which is the whole point of any of this. We can very easily, through ignorance and not thinking things through, sabotage ourselves by placing players into convenient 500-person apartments and then encourage these blocs to depart for the Next New Thing. I'm not aware of any perfect solution, but I do have some ideas which mitigate the possibilities. These are largely economic in nature which I'll cover in a later article.

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