An Analytical and Empirical Analysis of the Relationship between Embedded Economic Systems and Performance of Virtual Worlds

Abstract

The success of ‘Second Life’ and ‘World of Warcraft’ shows the popularity of virtual worlds and reveals the embedded economic system in them. While a large number of players interacts with each other in virtual worlds, an interesting phenomenon in virtual worlds is that players voluntarily create their own economy that involves trading virtual items or game money for real money, and this real money trading itself has become a several billion dollar business. In this study, we analyze the economic impacts of such trading of virtual properties, and the management strategy of the virtual economy (game) operators by using a two-period game theoretic model between game players and the game operator. We find that real-money trading benefits game operators, and there exists an optimal amount in terms of the supply of game items to maximize the profit of the game operator. Moreover, we find that the income disparity in real worlds can be reduced when real-money trading is allowed. Empirical analysis with data from popular virtual worlds also confirms our findings that real-money trading benefits game operators. Moreover, we also find that the playtime and trading price of game items have a positive relationship. With these results, our study indicates the strategic decision variables of online businesses with a virtual economic system are quite different from their counterparts in offline.