A Cost-Benefit Analysis of Real-Money Trade in the Products of Synthetic Economies

Info, Vol. 8, No. 6, October 2006

38 Pages Posted: 17 Jul 2006

Abstract

This paper describes a basic supply-demand model for real-money trade (RMT) in the goods produced within synthetic economies, and then applies welfare analysis to the external effects of that trade. The trade has emerged to the level of hundreds of millions of dollars in the past few years, mostly because of the rapid growth in the number of users of synthetic worlds. The externality that results is the disruption of ordinary game play for others: when some players use real money to buy game assets, the game itself is damaged in much the same way that the experience of playing Monopoly would be damaged if some players traded properties for real US dollars. Given the current amount of trade, the damages of RMT may be substantial, and the object of the paper is to provide a plausible range of estimates for the damage under reasonable assumptions about the market for synthetic goods and its effect on game-access subscriptions. The intended readership of the paper is a hybrid consisting of economists potentially interested in new markets in cyberspace, and game industry experts interested in the economic analysis of RMT. Since the expertise of these two groups does not overlap very much, the paper contains much material that is at an introductory level for one or the other. The objective is to provide a final analysis and set of estimates that appear to be reasonable to both groups from the standpoint of their respective expertise areas.

Keywords: Synthetic Economies, RMT, Cost-Benefit Analysis

JEL Classification: I86, H23

Suggested Citation

Castronova, Edward, A Cost-Benefit Analysis of Real-Money Trade in the Products of Synthetic Economies. Info, Vol. 8, No. 6, October 2006. Available at SSRN: https://ssrn.com/abstract=917124

Edward Castronova (Contact Author)

Indiana University ( email )

107 S Indiana Ave
100 South Woodlawn
Bloomington, IN 47405
United States

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