Optimal Pricing and Permissions Strategy for Virtual Good Creators in Second Life
35 Pages Posted: 23 Sep 2008 Last revised: 3 Jul 2014
Date Written: September 15, 2008
Second Life is an open-ended 3D virtual world where users can social network, participate in various activities, and create and trade virtual goods with each other. Due to increasing broadband Internet access, virtual worlds are rapidly emerging as an alternative means to the real world for communicating, collaborating, and organizing economic activities. The vibrancy of the Second Life economy in particular has caught the attention of many. Creators of virtual goods in Second Life can sell their creations for Linden dollars, which is exchangeable for real currencies such as U.S. dollars. An interesting phenomenon is that the creator of a virtual good can assign different permissions such as "copy", "modify" or "resell/give away" to the virtual good to be traded. These different permission settings have different impacts on the creator's profit. We compare eight scenarios of possible permission settings in the monopoly situation and find the optimal choice of permission setting as well as the corresponding pricing strategy. Our analytical results demonstrate that the "resell/give away" permission brings both opportunity and risk to the monopolist and influences consumer behavior most significantly in Second Life. Specifically, as long as the consumers' valuation of the virtual good does not decay dramatically, it is always profitable for the monopolist to apply the "resell/give away" permission to his virtual world creation. The more new users enter Second Life, the more profitable it is for the monopolist to assign "resell/give away". We also extend the model to a simple duopoly situation and show that the creators will earn the most revenue when they both apply the "resell/give away" permission to their virtual goods or neither of them uses the setting.
Keywords: virtual world, Second Life, pricing strategy, virtual goods, permissions
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