Selling Virtual Currency in Digital Games: Implications on Gameplay and Social Welfare1

Despite the fast growing popularity of in-game purchases of virtual currency (to obtain game enhancing virtual items) in digital games, there is very limited formal research that studies this new business model and its impacts on players’ gameplay behavior and social welfare. This paper builds upon the classic labor-leisure model to capture players’ dual experience of enjoying leisure and earning virtual currency when playing digital games. We examine the impact of selling virtual currency on players’ gameplay behavior and social welfare, relating players’ demand for in-game virtual currency to three key game characteristics – virtual wealth satiation point, rate of generating virtual currency, and rate of generating leisure. Our results suggest that the game provider can increase her profits by reducing the virtual currency’s price and increasing the number of available virtual items. We find that selling virtual currency reduces the playing times for the majority of players, which helps alleviate the risk of excessive gaming. Selling virtual currency also leads to a larger player base and more people enjoy the many benefits from playing digital games. Finally, we demonstrate that selling virtual currency could lead to a “win-win-win” situation for the game provider, players, and society.