The current study presents a novel experimental design to examine how "real-life" peer relationships modulate altruistic punishment of bullies and compensation of victims after "observed" ostracism. Twenty-four participants (age 20) were invited to an experimental session in groups of three classmates and two unfamiliar peers, where they engaged in online interactions with one another. They played a series of virtual ball-tossing games (Cyberball) where they "observed" the ostracism of a classmate by another classmate and an unfamiliar bully. In between the Cyberball sessions, participants played economic exchange games where they could invest money to increase or decrease the payoffs of the players from the preceding Cyberball session. Participants punished classmate bullies and compensated victims more when they liked the victim more than the bully. Importantly, participants punished familiar bullies less severely than unfamiliar bullies when the familiar bully was better liked than the victim.