An Empirical Analysis of Virtual Goods Pricing Strategies in Virtual Worlds

3D Virtual worlds are computer mediated environments intended for the users to inhabit and interact via their representational avatars. Trading virtual goods in 3D virtual worlds plays an important role in realizing the virtual economy. This essay examines the impact of the unique virtual goods permission settings (Copy, Modify, and transfer) on creators’ pricing strategies. We collect data of virtual items from the Second Life marketplace XStreet to explore the factors that affect virtual goods prices. We use ANOVA to test the relationship between each permission and price, and conduct random effects model to investigate how permissions affect price in different categories. Our empirical results show that “Copy” permission, which might be regarded to reduce the profit of the creators, has a positive effect in virtual goods pricing strategies. Virtual items are more likely to be assigned “Copy” which seems to give additional duplicates for free. Furthermore, prices of virtual goods with “Copy” permission are higher than those without, and the more copies a consumer wants, the higher the price difference between the items with “Copy” and those without “Copy” permission. The effects of other issues on virtual goods prices are analyzed and managerial implications are discussed

The Impact of Community Involvement on Game Life-Cycle: Evidence based on Gaming Platform Steam

Later stages of the product life-cycle are characterized by diminishing sales and declining prices. Especially firms with substantial product development costs, as is the case in the video game industry, are dependent on long product life-cycles to amortize initial costs. This confronts firms with the fundamental challenge of maintaining the value of their product from the consumer’s perspective and thus delaying the natural price decline. We investigate whether product features that facilitate community involvement and interaction are an effective means to keep the product stimulating and relevant in the long run. Using extensive data from the PC video game market, we show that the inclusion of interactive, community-engaging features allows firms to both charge higher prices and delay the natural price decline of their product. However, for one of the investigated features we find the opposite effect, which we explain by subsequent analysis. Thereby, we gain valuable insights into the importance of robustly designed incentive systems in community-focused features. Our findings could help firms in their efforts to design attractive and economically viable products with prolonged life-cycles. Keywords: Product life-cycle; digital goods pricing; user communities; co-creation; digital gaming platforms.Later stages of the product life-cycle are characterized by diminishing sales and declining prices. Especially firms with substantial product development costs, as is the case in the video game industry, are dependent on long product life-cycles to amortize initial costs. This confronts firms with the fundamental challenge of maintaining the value of their product from the consumer’s perspective and thus delaying the natural price decline. We investigate whether product features that facilitate community involvement and interaction are an effective means to keep the product stimulating and relevant in the long run. Using extensive data from the PC video game market, we show that the inclusion of interactive, community-engaging features allows firms to both charge higher prices and delay the natural price decline of their product. However, for one of the investigated features we find the opposite effect, which we explain by subsequent analysis. Thereby, we gain valuable insights into the importance of robustly designed incentive systems in community-focused features. Our findings could help firms in their efforts to design attractive and economically viable products with prolonged life-cycles. Keywords: Product life-cycle; digital goods pricing; user communities; co-creation; digital gaming platforms

Classifying Real Money Trading In Virtual World

Virtual world activities related to the buying and selling of virtual currency, virtual items, and services with real world money are referred as Real Money Trading (RMT). Although there is a great deal of evidence for the growth of RMT in virtual world, there is also evidence to suggest that many companies are struggling to become involved with RMT. A framework for classifying RMT in virtual world is essential for devising successful virtual business strategies. A key component in the process of formulating the optimal competitive strategy is to understand the unique characteristics of RMT and the implications behind those characteristics. This study aims to propose a classification of RMT based upon the characteristics of products and services, the transaction and marketplace, as well as the currency and exchange systems

PRICING STRATEGIES FOR ONLINE MULTIPLAYER GAMES

This dissertation examines the different pricing strategies available to online multiplayer game publishers. We develop mathematical models of the pricing decision that the publisher engages in and conduct a numerical experiment to identify critical parameters for the pricing decision. We also develop an agent based simulation to further examine the influence of these parameters on the dynamics between the publisher and consumers and make recommendations about the conditions under which certain pricing strategies are superior to others

Modeling economic systems as locally-constructive sequential games

Real-world economies are open-ended dynamic systems consisting of heterogeneous interacting participants. Human participants are decision-makers who strategically take into account the past actions and potential future actions of other participants. All participants are forced to be locally constructive, meaning their actions at any given time must be based on their local states; and participant actions at any given time affect future local states. Taken together, these essential properties imply real-world economies are locally-constructive sequential games. This paper discusses a modeling approach, Agent-based Computational Economics, that permits researchers to study economic systems from this point of view. ACE modeling principles and objectives are first concisely presented and explained. The remainder of the paper then highlights challenging issues and edgier explorations that ACE researchers are currently pursuing

The impact of functional and social value on the price of goods

According to hedonic pricing theory (HPT) market forces operate on individual characteristics of a good, and the price of a product is the aggregate of the price across those characteristics. The relationship between price and characteristics remains poorly understood because characteristic qualities are hard to quantify, people have varying levels of information about characteristics, and people have heterogeneous preferences over characteristics. By analyzing data from a large, market-driven virtual world we are able to test HPT, while largely avoiding these pitfalls. We find that a linear model with functional characteristics predicts the prices poorly, but a log-linear model performs quite well. Adding social characteristics to this log-linear model improves the predictions substantially. This work strongly supports HPT and demonstrates a "rational" calculus including social value

Are secondary markets beneficial for a virtual world operator?

Selling virtual goods for real money has become the dominant business model for virtual worlds in the past decade. As the amount of money involved in virtual goods sales increases, market performance questions gain relevance. In this thesis, we examine the effects of secondary markets on the profitability of a virtual world service provider operating under a virtual goods sales model. More specifically, we ask whether the service provider should tolerate secondary markets or seek to kill them off. The structure of this thesis is as follows: we first review how virtual worlds operate as businesses and provide an analysis of the market conditions faced by a virtual world operator to provide sufficient context for the reader. We then examine the inner workings of virtual economies and review structures commonly encountered within them. Next, we conduct a literature review on real world secondary market models and analyses. Finally, we evaluate the implications of real world secondary market results on secondary markets for virtual goods. In the final section, we present conclusions and possible avenues for further study. We find that recent durable goods research suggests that a profit-maximizing monopolist will not shut down secondary markets, but will choose to reduce durability of goods instead and that these results can apply to virtual worlds as well. However, we also show that the question of allowing or not allowing secondary markets cannot be answered based on profitability alone and that service providers have to also account for externalities brought on by secondary markets

Seeking the Entanglement of Immersion and Emergence: Reflections from an Analysis of the State of IS Research on Virtual Worlds

This paper critically reviews the state of virtual world research within the Information Systems field; revealing areas of interest evident in research studies between 2007-2011, the methods employed to conduct such research, the theories/frameworks used to ground VW research, as well as reoccurring memes/concepts. We argue that virtual worlds are best interpreted as both an immersive and emergent co-creative process, ‘performed’ by users’ actions and interactions both with other users and with artifacts such as virtual goods. Nevertheless, our analysis reveals a near neglect of the substantive nature of digital materiality and of the emergent nature of virtual worlds. We conclude that this ‘human-centric’ stance has taken focus away from the unique nature of the virtual world artifact itself, and posit a research agenda that focuses on virtual world objects as well as the immersive and emergent activities of ‘world-builders’ as necessary to advance virtual world research