A Welfare Analysis of Gambling in Video Games

In 2020, gamers worldwide spent more than $15 billion on loot boxes, a lottery of virtual items built into video games. Loot boxes are contentious, as regulators worry that they constitute gambling. In contrast, video game companies maintain that loot boxes are complementary to gameplay. Using data from a mobile puzzle game, we separate out alternative mechanisms behind tastes for loot boxes. We find that the sources of value of loot boxes differ dramatically between “whales,” 1.5% of players responsible for 90% of the game’s revenues, for whom only 3% of loot box utility comes from gameplay complementarity, and everyone else who open loot boxes mainly (90% of utility) for in-game value. We leverage taste estimates to evaluate product (game and loot box) design counterfactuals, showing how the company trades-off revenue from whales and engagement with the game from non-whales. We measure the welfare effects of three policy actions – a blanket ban on loot boxes, a ban on paid loot boxes, and limit-setting on the players’ expenditures. We find that a debated policy option, a blanket ban on loot boxes, hurts consumers by removing the gameplay complementarity that players derive from loot boxes, and we present evidence in favor of spending caps.