Abstract
PPP has been remarkably hard to confirm in empirical work. Conspiring against it are data and modeling issues, in addition to barriers to trade that create a “band of inaction”. We circumvent these obstacles via a natural macro experiment in the virtual game World of Warcraft. This simplified environment allows us to model and calculate the band of inaction, and test for PPP across eight replicas of the game. In addition, our data covers a major aggregate shock to the game, called Cataclysm, which lets us observe markets’ reactions to the shock, and track price levels of newly created goods. We find that price levels remain within the band of inaction, and are highly correlated. When price levels diverge, arbitrage opportunities arise, and the price level differentials quickly become mean-reverting.
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