Selling Virtual Items in Free-to-Play Games: Transparent Selling vs. Opaque Selling

Abstract

The market for online games is huge, but research on the economics of online game operations remains nascent. In this paper, we focus on “free-to-play” online games in which a game provider offers players an option to purchase game-specific virtual goods (items) for improving their winning chances before the game begins. Because selling virtual items is the main revenue stream in free-to-play games, it is important for game providers to find ways to entice players to purchase virtual items. We observe that some game providers disclose the opponent’s skill level before the game begins by using a “transparent selling” mechanism to sell virtual items, whereas others conceal this information from the players. This observation motivates us to examine whether and when game providers should adopt transparent selling. By analyzing a game-theoretical model that involves one game provider and two competitive players, we obtain the following results. First, when the price of the virtual goods is endogenously determined by the game provider, we find that transparent selling is not effective: it is optimal for the provider to adopt “opaque selling” by concealing the opponent’s skill level information from players. However, opaque selling hurts the player’s welfare. Second, when the selling price is exogenously given, transparent selling dominates opaque selling when the given price is high. Our results identify the conditions under which transparent selling dominates opaque selling.