The analysis of network virtual money demand under double-way exchange mechanism based on portfolio theory

Abstract

Network virtual money, as a method of attracting players and increasing revenue for game operators, has played an important role in the rapid development of network online games. With virtual money, some economic phenomenon such as inflation in virtual environment has emerged, which attracted wide attention from academics. This paper proposes that virtual money demand should be taken into consideration when game operator makes its virtual monetary policy in order to curb the inflation in virtual world. We used the ldquosecond liferdquo as an example, combined Friedman's monetary demand theory and the portfolio theory, innovatively established the virtual money demand model under doubleway mechanism. We argue that, under the double-way mechanism, the motivations of keeping the virtual money are mainly for the purpose of transactions, precaution and speculation. Hence, the virtual money demand volume depends on the price level of virtual items, virtual interest rate and interest rate in the real world. Empirical study in "second life" validates the analysis. We also find that under double-way exchange mechanism, operator has limited measures to adjust money supply with money demand and control the movement of virtual price. Finally effective solution measures were listed to resolve the current predicament Linden Lab was facing.