As stated in my last post, vendor-based economies rely almost completely on NPCs to provide weapons, armor, and anything else you use in-game. Think back to the first few RPGs that existed, where every mob you killed earned you gold, and you used gold to buy stuff in town (DragonWarrior comes to mind). In an MMO based on this idea, players get everything they need from the NPCs.
This is a very stable economy. The developers control how much things cost, and their relative availability. This setup usually involves there only being money as loot, and maybe the rare (and usually useless) item drops. It also lends itself very readily to the item shop sort of revenue system, as players only have one source for equipment, why not have them pay a little to get better gear?
The only game I've played lately that shows this system in effect as an MMO is MapleStory. Though I haven't played it much (like 15 minutes when I was bored) the system works well for that type of game. Because the world is so unbelievable and looks like a game, the mechanics can be very RPG-like, and there is no need for player immersion.
Which leads me to a major flaw in the vendor-based economy: Lack of a Community. Any game where you do not *need* to talk to another person in your entire course of play will not have a strong community. I will be going more in depth with the need for a community in MMORPGs later, but for now, let's just say I value communities highly. As you get everything from vendors, and nothing from another player, there's no reason to know another player in the game, short of grouping up. These games are largely meant to be played alone, and not in groups. Without the glue of a player community, these games are a passing fancy.
Up next is the loot-based economy. Maybe those Ogre Boots of the Bandit +30 will drop while you're reading it.