Inflation of Virtual Currencies: Effect of Real Money Trade on Price Formation in World of Warcraft and Other Virtual Economies

This work is a a first serious attempt to analyse working of virtual markets using tools of rigorous economic analysis. On case study of World of Warcraft game it first introduces the reader to basics of Virtual Economies. It starts by examining price formation of virtual goods, which is traced back not only to the mechanics of game, but also to gold farmers - considerable number of (usually) Chinese players, who make their living through sale of virtual items and currencies. Second part then analyses development of RMT markets where farmers sell virtual currencies for real cash. Finally author examines inflation of virtual currencies finding its key drivers inside of the game, but surprisingly also in EUR-CNY and USD-CNY exchange rates. The part concludes with statistical evidence confirming popular opinion that Blizzard (virtual currency issuer) is the main cause of Inflation in World of Warcraft. Last two theoretical parts of the book are devoted to microeconomic analysis of virtual currency issuer and user. These two naturally result into description of environment with multiple currencies, challenging traditional Kyotaki & Wright stability framework.