The virtual cathedral and the virtual bazaar

Abstract

Applying economic analysis, we explore the potential benefits and risks associated with firm-based and social production models and derive conditions that determine when open or closed innovation models are more appropriate. We contrast the newly emerging "user-generated approach" to innovation in virtual worlds with the traditional "producer-controlled approach". Taking the cases of World of Warcraft and Second Life, we show how the two virtual world providers use very different strategies to organize the creation of game content. We conclude with presenting a roadmap that businesses can use to conceive effective innovation and development strategies for designing virtual world offerings.