Handbook on the Economics of the Internet
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Handbook on the Economics of the Internet

Edited by Johannes M. Bauer and Michael Latzer

As the single most important general purpose technology of recent times, the Internet is transforming the organization, competitive structure and business models of the private, the public and non-profit sectors. In 27 original chapters, leading authors discuss theoretical and applied frameworks for the study of the economics of the Internet and its unique economics as a global information and communications infrastructure. They also examine the effects of the Internet on economic transactions (including social production, advertising, innovation, and intellectual property rights), the economics and management of Internet-based industries (including search, news, entertainment, culture, and virtual worlds), and the effects of the Internet on the economy at large.
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Chapter 24: The economics of virtual worlds

Isaac Knowles and Edward Castronova


Virtual economies refer to the systems of production, distribution, and trade that have emerged in online spaces, especially virtual worlds. Their origins can be traced to the 1970s, when videogame developers first gave players the ability to play and trade with one another in the same virtual world. As the number of people with Internet connections increased, and as computer power advanced, the populations of virtual worlds rose along with the size and complexity of the economies in those worlds. In this chapter we review the development of and the research surrounding these economies. We examine how the real and virtual economies interact with one another and the issues such interactions create for virtual world operators. We discuss why the industry has evolved new business models in order to deal with the ‘real money trade’, that is, the market in which players trade real money with each other and with third parties in exchange for virtual goods and services. We also look at the economic research resulting from the study of virtual economies.

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