Pricing of Virtual Goods
Definition of Virtual goods
When referring to a ‘virtual good’, we’re referring to non-physical objects that are purchased, only to be used within online communities or games. These are not digital goods such as books, music, movies or even apps which can be used in the real world but merely in-game or in-app purchases. Nature of these in-app purchases could be anything from clothes and accessories for your character in the game to purchases of the next level in the game.
In order to understand pricing of virtual goods, we need to first understand how some of the economics of in-game purchases. 1. Massively Multiplayer Online Role Playing Games (MMORPG) have their own in-game currency. For eg: Second Life has Linden Dollars, World of Warcraft has gold and silver etc. These can be earned within the game or can be bought with real money in order to buy other in-game virtual goods that you might need. Here, the game currency and real currency have an exchange rate and all virtual goods are priced relative to the in-game currency 2. Games such as Farmville and Cityville, don’t have such individual currencies but virtual goods can be directly bought directly using real-world currency 3. Similarly, apps and games on app-stores also employ in-game mechanics to trigger purchases of additional levels and/or hints etc.
Understanding costs associated with Virtual goods
To understand the relevant costs associated with a virtual good, we need to understand what it takes to create a virtual good. However, the costs are not of creating the virtual good per se, but of hosting and maintaining the larger online community or game. These would largely be fixed overhead costs. The marginal cost associated with the production a virtual good is quite negligible. However, the fixed costs for the different kinds of games would differ. 1. For MMORG and social games such as Farmville and Cityville, costs would be in terms of maintenance of servers, salaries of
When referring to a ‘virtual good’, we’re referring to non-physical objects that are purchased, only to be used within online communities or games. These are not digital goods such as books, music, movies or even apps which can be used in the real world but merely in-game or in-app purchases. Nature of these in-app purchases could be anything from clothes and accessories for your character in the game to purchases of the next level in the game.
In order to understand pricing of virtual goods, we need to first understand how some of the economics of in-game purchases. 1. Massively Multiplayer Online Role Playing Games (MMORPG) have their own in-game currency. For eg: Second Life has Linden Dollars, World of Warcraft has gold and silver etc. These can be earned within the game or can be bought with real money in order to buy other in-game virtual goods that you might need. Here, the game currency and real currency have an exchange rate and all virtual goods are priced relative to the in-game currency 2. Games such as Farmville and Cityville, don’t have such individual currencies but virtual goods can be directly bought directly using real-world currency 3. Similarly, apps and games on app-stores also employ in-game mechanics to trigger purchases of additional levels and/or hints etc.
Understanding costs associated with Virtual goods
To understand the relevant costs associated with a virtual good, we need to understand what it takes to create a virtual good. However, the costs are not of creating the virtual good per se, but of hosting and maintaining the larger online community or game. These would largely be fixed overhead costs. The marginal cost associated with the production a virtual good is quite negligible. However, the fixed costs for the different kinds of games would differ. 1. For MMORG and social games such as Farmville and Cityville, costs would be in terms of maintenance of servers, salaries of