Virtual Property Trade in Online Games

Industry revenue for online games is surging. A unique phenomenon in this market is the significant volume of trade among game users, who exchange real money for virtual goods that do not exist in the real world. The market of virtual goods has two distinctive characteristics: 1) the resold virtual items normally involve no quality loss since the attributes are digitally defined, and 2) the game companies can impose measures to control the trade. Intuitively, game providers should restrict competition from potential traders of virtual goods. However, in practice game providers adopt dramatically different trade policies, ranging from strict prohibition to explicit permission. This paper attempts to analyze the optimal trade policy from a game provider’s perspective. We find that, despite the reduction in unit revenue, the firm may benefit from abandoning a strict trade policy. This is because the players’ decision to participate in the game is influenced by their estimate of the firm’s optimal behavior, which in turn can be strategically affected by the trade policy.