Why give away something for nothing? Investigating virtual goods pricing and permission strategies

Abstract

With the rapid increase of virtual goods created for virtual world exchanges and the record growth of user-to-user transactions in these in-world economies, an important question is how a creator sets prices for a virtual good so as to maximize her profit from her creation. Virtual goods share similar economic properties (such as substantial production cost and negligible marginal cost) with other types of digital goods. However, one aspect that distinguishes a virtual good is that consumers in a virtual world may want to use multiple copies of the identical good at the same time, and such simultaneous use of multiple copies of the identical good increases a consumer's utility. In this research, we focus on the COPY permission of virtual goods. We develop an economic model to examine under what conditions the COPY permission setting leads to the highest profit for the creator of a virtual good, and what the pricing strategies are in a dynamic setting when such permission choices are present. Theoretical and practical implications of the research are discussed.