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Economic design in the virtual world : the fee structure and sales mechanism in the P2P trading market in online video games

University of British Columbia

Massively multiplayer online games (MMOGs), often referred to as online video games —which enable players to interact with each other in a virtual world—generate significant and growing economic value. The predominant business model is free-to-play, in which collecting fees from in-game player-to-player (P2P) trading markets is an important way for firms to generate revenue. Surprisingly, quantitative research on the free-to-play business model in this industry is limited and, in particular, a thorough empirical investigation of the design of the P2P market is lacking. This thesis examines the fee structure, followed by an initial investigation of the sales mechanism. To understand the fee structure, we examine two commonly designs: listing fee (charged upfront) and commission (charged upon transaction). While it seems intuitive that listing fee—an entry cost—should lower the listing and transaction volumes (common industry indicators of long-run profitability) more than commission does, it is unclear which structure generates higher fee collection (short-run revenue). To answer this question, a structural model is developed to capture players’ trading behavior and applied to a popular game. The model is empirically challenging due to several industry features including a large number of long-lived players with unobserved heterogeneity. We tackle the challenge by assuming that players don't use their identities as information to form the sale probability, which is innocuous when each player’s impact on outcomes is small. We prove the existence of equilibrium, propose and implement a computationally light estimation procedure. Through counterfactuals, we find that there is a trade-off between them: listing fee (vs. commission) generates lower listing volume, similar transaction volume, and greater fee collection. We discuss the managerial implications. To better understand the sales mechanism, we compare fixed-price posting and auction. Due to data limitation (only fixed-price posting is observed), our goal is to develop a tractable auction framework (for estimation with actual auction data) and to conduct preliminary analysis. Using parameter estimates from the fixed-price posting data, our initial counterfactual shows that there is a trade-off: auction generates higher fee collection and listing volume, but lower transaction volume. We discuss the limitations and managerial implications.

Text

2017-06-21

Attribution-NonCommercial-NoDerivatives 4.0 International

http://hdl.handle.net/2429/62074

Business Administration - Marketing

University of British Columbia

UBCV

http://creativecommons.org/licenses/by-nc-nd/4.0/