Analysis of the Relationship between Virtual Goods Trading and Performance of Virtual Worlds

The success of online games such as “Second Life” and “World of Warcraft” shows the popularity of virtual worlds and reveals the economic systems embedded in them. A large number of players interact with each other in cyberspace, giving rise to an interesting phenomenon where players voluntarily create their own economies that involve trading virtual items or game money for real money. This real-for-virtual-money trading itself has become a several billion-dollar business. In this study, located in Korea, we analyze the economic impacts of the trading of virtual properties and the management strategies of the virtual economy (game) operators by using a two-period game theoretic model between the game players and game operators. In this model, players endogenously switch between seller and buyer roles. We find that real-money trading benefits game operators, and there exists an optimal amount in the supply of game items that maximizes their profits. We also find that the income disparity in the real world can be reduced when real-money trading is allowed. An empirical analysis with data from popular virtual worlds also confirms our findings that real-money trading benefits the game operators. Moreover, we find that playtime and the trading price of game items have a positive relationship. Our findings, from both the analytical and empirical analysis, strongly imply the importance of the embedded economic systems in virtual worlds