An Analysis of Virtual Currencies in Online Games

Abstract:     
In virtual worlds of MMORPGs (Massively Multiplayer Online Role-Playing Games), we observe that many players purchase virtual items by using real currencies, which is so-called eBaying. Extending the model developed by Castronova (2001), I analyze the value of virtual items in the virtual and real markets. The analysis reveals that incentive for eBaying is inherent to the game design. In addition, I classify the virtual currencies as a Local Exchange Trading Systems (LETS) because they are used in limited communities, not under control of money supply by the central banks, and not subject to interest rates. Since these currencies are not subject to geographical boundaries, they can potentially be global LETS. The eBaying effectively means that the virtual currencies have exchange rates with real currencies, and thus have become meaningful for our economy. The online virtual worlds increase its importance for our life, and so does the virtual currencies.

Keywords: Online games, currency, eBaying, LETS

JEL Classifications: L86

Working Paper Series