In the fall of 2018, I wrote a paper in my senior year of college identifying the elements of the Steam Marketplace and how each could be a potential problem for users who have to rely on Valve’s platform to play most competitive games online. The paper proposes an explanation for market behaviors in the Steam marketplace for virtual tradable items. The data indicated strong correlations between symptoms of uncharacteristic patterns in market prices for virtual items and transactional behavior that would otherwise obey orthodox laws of supply and demand in a traditional marketplace that we would visit on any normal day—like Walmart or Target. Successful trading in such markets takes but a rudimentary understanding of an item’s value, some imagination about how other users would value the item, and access to resources that report value—like third party analytics sites (yes, they exist for virtual items!). Even if the intricacies in the process of trading online virtual items could not be articulated by users, they certainly understand what it takes to make money and create value from virtual item commerce. The consequence of these trades and online commerce ecosystem creates artificially high prices and predatory market manipulation. The game analyzed for the paper was Counter Strike: Global Offensive, and the virtual items of this particular game are strictly cosmetic.
In 2015, The Steam online gaming marketplace, a product of Valve Corporation, was worth roughly $3.5 billion dollars. Steam is a titan in the online gaming marketplace, and certain games that offer their own in-game purchasable items can be bought by users and sold in the Steam market. The Steam marketplace connects millions of users in games only offered through their market and offers thousands of purchasable items that range from $.01 cent to $1,851.00 in Counter-Strike: Global Offensive. In any given moment, a user can collect any purchasable item and then sell it in the marketplace at a current market price. Buyers looking for these items have the opportunity to bid on the item and receive it when the item adjusts to a requested price, or they can choose to purchase the item already listed on the market. This feature is similar to Ebay’s “buy it now.” Bidding on an item—or more specifically, items in Counter Strike: Global Offensive—in the Steam marketplace works as a matching system. A user places a bid for an item that is currently not available at a desired price and Steam “matches” that requested price with a corresponding item once it becomes available and moves the next person up in a queue for the next price requested once another item becomes available at the next requested price. Steam takes a percentage of the final price of the item as a transaction fee when a user sells or buys an item and is thus taken into consideration when a user lists their item(s) on the marketplace for sale. Transaction fees are therefore passed down to users as a cost of trading in the marketplace. This higher cost of acquisition is known as “friction.”
Given the nature of competition in this market (many sellers one of any particular item at any particular time), users continually undercut each other to capitalize on user traffic in the market by virtue of the volume of trades and posts for weapon skins. They are likely to have their item sold at a competitive price. The Steam market connects thousands of buyers with other sellers who price their items on a variety of reasons like expectations and the number of items in circulation—which is indicated by the rough prices of the item in the market. Where the enterprise becomes interesting is the consideration that the Steam market diverges from the traditional marketplace in the respect that at its core, all of the prices are artificially created by Valve by virtue of the amount of the given item that is arbitrarily released for sale—rather than from determining prices from the cost of inputs and labor, for example. Additionally, these virtual items in Counter Strike are totally and completely aesthetic—they give no competitive edge or advantage to any user (except maybe the confidence in being able to show off).
Steam developers choose many different design patterns (“skins”) for in-game weapons and bundle them into prize crates. Weapon keys and crates are another useful factor of price of a weapon design or other virtual item. Users can buy newly issued keys for an average price above some “equilibrium” price within the first few days of release. Prices of crates remain relatively low and stable compared to keys over time with the exception of a small window of time after release. Users purchase keys and crates to obtain newly issued weapons skins. Once opening a weapon create, receiving a random weapon skin which ranges from “common” to “rare,” a user may then choose to sell or trade that item opened into the steam market or a third-party market for a lower price like “OP Skins.” “OP Skins” is a third-party market in which users can legally sell their Valve items to other users because the intermediary is still Steam (Valve). Users treading in OP Skins may choose to sell their skins to the website for actual dollars (instead of only having a client-only wallet balance). Through these third-party sites, users can have their funds transferred to PayPal and subsequently transferred to their bank accounts. Items in this market are cheaper on average than Steam marketplace because OP Skins takes a percent cut and users pay for the price of convenience and transferability of funds. It is one of the few sites that allows users to make this transaction, so the trade-off is that the average prices of skins in that third-party market are relatively cheaper.
The laws and behaviors governing activity in the Steam market are routinely inconsistent with conventional markets in several respects, the first of which is with regard to items that are tangible – items that are physically felt and can be utilized at the point of purchase. In the online gaming marketplace(s), the items that are created are not tangible. They cannot be physically held (other than by a virtual character); and they do not serve a unique purpose or utilized in any particular way that a default weapon “skin” would not already be useful. Second, there is no supplier of inputs, no input costs, and almost no costs involved that is unique to producing an online traceable item (other than labor of the programmer). Although the popularity of unreleased weapon skins in the community gallery are enough to command the attention of the programmers to signal that there is demand for a design, weapon skins are picked by Valve to be put into the game with no identifiable criteria.
Until there are enough people who have gotten the random virtual weapon from opening a case to start competing in the marketplace and driving down prices for newly issued skins (one aspect that functions as a traditional marketplace would), a user has to rely on the fact that a purchase of that corresponding weapon case will yield a random endowment of any given desired item. In a conventional marketplace like the grocery store, a consumer signals with their dollars their willingness to pay by virtue of the purchase price. In the Steam online marketplace, behaviors, willingness to pay, and demand are, in many ways, divergent of real-life traditional market scenarios.
Another important element that Valve utilizes in its Steam market to boost revenue is the use of stickers on the weapons used in game. Users may also buy stickers for weapon skins that range in value according to a certain gaming event that corresponds with it. However, adding stickers to weapon skins adds no value to the weapon skin itself. There is a nostalgic aesthetic component to collecting and applying stickers. If a sticker is uniquely rare and placed on a weapon skin that may already be expensive, then the average time occupied on the market by that weapon skin is longer because that user may have the only combination of a particular sticker and weapon skin, like a monopoly. A user may eventually sell the item to a trader and also maintain a monopoly price on that weapon skin. Alternatively, if that particular weapon with those particular stickers are listed for too long, the monopolist in this scenario will have to lower his or her price if they wish to sell. This again is because adding stickers does not actually add any value to that weapon. Stickers influence the way sellers interact in the market that are uncharacteristic of real-life markets due to the commitment to this perceived common value. Stickers may be viewed as a traditional “complementary” good. However, the prices for stickers does not traditionally correspond in any meaningful way with the other goods that they are designed to compliment. If the price of a sticker increases, decreases, or otherwise changes, the price of weapon skins does not change as a response. There is no strong causal relationship between the price of stickers and weapon skin prices, but Steam makes more money on this anyways because people are willing to show other users their flair, and perhaps a boost of confidence.
An overarching issue by which other disparities in the market for skins arises includes the willingness to engage in micro-transactions. The strategy of micro-transactions appears to be discriminatory, “efficient,” and a reliable way to profit from a high frequency and volume of virtual item trading while marginal costs of producing these tradable items remains consistently low. Micro-transactions are a thriving practice that is showing to be more profitable than past strategies for pricing nonessential game items. Micro-transactions are used as a proxy for price discrimination in which companies like Valve offer collectable variations of “loot” and other tradable items that are largely non-essential elements of the game. This emerging business model enfeebles innovation and necessary updates in the game and relies on aggressive wealth accumulation. For other games, like Candy Crush: Saga, game companies provide a non-dollar amount with purchasable items. The reason they are able to exploit this and profit from its practice is purely psychological and sociological. For example, If users can see that the purchase price for prizes in a game is measured in gems instead of specific dollar amounts, it becomes much easier to spend because there is no immediate feeling of a real amount lost, especially when a bank card is already entered in the game for “convenience.”
The changing dynamic of online gaming (and more broadly the Tech industry) can certainly pose more costs to users and be economically inefficient. It allows companies like Valve to extract even more profit from micro-transactions, like in-game purchases. Users are more than happy to make these purchases, even when the game is cheaper than a conventional video game at $60, even if “cheaper” means “free.” These new ways of accumulating profit seem to be the new normal, similar to that of the rise of streaming services pricing to combat the woes of cable, and tangential to the blatant anticompetitive abuses of big tech. As a consequence of policy, online gaming popularity, and law abuses, game developers are willing to look closely at this practice. If they heed the advice of giant trailblazers like Valve, they will be able to cleverly extract even more revenue from games sales than ever before—and that could be a problem.