“Economic Design in the Virtual World: the Fee Structure and Sales Mechanism in the P2P Trading Market in Online Video Games” by Mr. Yitian Sky Liang
Mr. Yitian Sky Liang
PhD Candidate in Marketing
Sauder School of Business
University of British Columbia
The Massively‐Multiplayer‐Online (MMO) games, in which players interact with each other in a virtual world, generate significant economic value and are growing at a rapid rate. The business model in this market has shifted from pay‐to‐play to free‐to‐play, in which firms earn revenue from selling virtual products and collecting fees from the player‐to‐player (P2P) trading market in the game. Given the importance of this industry, it is surprising that no research has yet studied the business model in this market. This paper examines fee collection from the P2P market, which is a more economically interesting context than sales of virtual products. Specifically, we focus on two economically relevant dimensions, fee structure (listing fee vs. commission) and sales mechanism (fixed‐price posting vs. auction). A structural model is developed to capture players' trading behavior while accommodating two unique features in this context: the homogenous product with price variation and the endogenous selling and buying decisions. The model is empirically challenging due to a common industry feature: large number of long‐lived players with unobserved heterogeneity (in their preferences). This is resolved by making an assumption that players don't use their identities as information to form the sale probability, which is innocuous when there is a large number of small players. We prove the existence of equilibrium under this assumption and propose a computationally light two‐step estimation procedure. Through counterfactuals, we find there is a trade‐off between listing fee and commission, e.g., the former generates higher fee collection with substantially lower listing volume and slightly lower transaction volume. As a preliminary analysis, we also find there is a trade‐off between fixed‐price posting and English auction, i.e., auction generates higher fee collection and substantially higher listing volume but significantly lower transaction volume. We explore the underlying mechanism and offer managerial implications.