A Welfare Analysis of Gambling in Video Games

Abstract

In 2020, gamers spent more than $15 billion on loot boxes, lotteries of virtual items in video games. Loot boxes are contentious. Regulators argue they constitute gambling, while game producers maintain they complement gameplay. In a prototypical mobile puzzle game we show that gameplay complementarity accounts only for 3% of loot box value for high-spending players. In contrast, the majority of players open loot boxes predominantly for gameplay complementarity. The company designs the game trading off revenue from high-spending players and engagement from other players. Our estimates challenge a debated blanket ban on loot boxes and support spending caps.

Keywords: Product design, lotteries, gambling, dynamic demand models, video games

JEL Classification: D12, D18, D61, D91, L82, L83, M31, M38