Why are gaming skins so expensive? It's the Veblen good effect
According to a recent GWI survey on gaming monetization trends, the average American gamer spends about $18.60 a month on in-game purchases, with the majority of those purchases providing no advantage to players in terms of winning (in-game) whatsoever. The usage of skins in video games is similar to Veblen Goods, where the price itself raises the perceived value; this is because the more expensive the item, the more desirable to others it becomes, thus growing its desirability.
When a higher price makes a good more desirable, the law of demand no longer holds
According to Veblen, goods are desirable products because their price increases create the perception of status. The Veblen effect means that in the case of Veblen goods, when the price increases, the demand for the goods increases. Premium skins follow exactly this pattern. When developers charge extremely high prices for items that are difficult to obtain, the appeal of these items lies in their exclusiveness, so demand increases. Economists refer to the behaviour behind this type of purchasing as conspicuous consumption: purchasing for display purposes rather than functional purposes.
While a gun skin, for example, does not shoot any faster, nor does a dance emote increase the odds of winning a match, these items can still be sold for hundreds or even thousands of dollars at times because their value is based on how few people have them. Developers purposely create shortages of these types of items through limited-time store availability, seasonal vault items and the infrequent drops of higher-value items. Fortnite provides players with a rotating store where they can buy skins, making the skins that come around in a future rotation seem special. In contrast, Counter-Strike hides the majority of its most valuable knife skins behind very long and difficult odds for the average player to get. This fashion creates a scarcity of the product and allows for a cosmetic (as in something that is only cosmetic in nature) to maintain its price, regardless of whether or not there is any value in the item to the player.
Cosmetics in games often evolve into a form of status.
For example, a luxury watch only holds its value as a status symbol if it is recognisable to others; likewise, cosmetics for players hold their status based on the amount of time the item has been available and how well-known the item is. As the audience of a particular cosmetic grows, the social status or worth of a particular cosmetic grows with the audience. The knife skin that 1000s of players could instantly identify as expensive holds much more status than the skin that no one is familiar with. Skins that are recognised at first glance as the most valuable, such as Dragon Lore skins in Counter-Strike or Early Battle Pass Skins in Fortnite, are commonly the ones that the entire player community can recognise at first glance. Therefore, the most significant multiplayer gaming titles maintain the most extensive and most profitable cosmetic economies because their audiences supply the level of recognition for the cosmetics associated with that particular gaming community. If the players are not able to identify the cosmetics, the status of the cosmetics is lost as the display has become worthless due to lack of visibility.
Skins in games are an example of a Veblen good, not a Giffen good.
These two types of goods defy the traditional price progression, but from opposite directions. A Giffen Good is a low-priced staple good that consumers with low income purchase more of when its price increases, simply because they can no longer afford anything better. The demand for a skin as a prestige item is not based on economic hardship; rather, it stems from a desire to attain a certain level of social status and prestige. As a result of this difference, skins are best understood as Veblen Goods and will always have a higher price due to this need to attain a specific social status. Developers should understand this: price does not simply represent the numeric value assigned to the skin; the price is also part of the product that players buy into. If the price is too low, the exclusivity of the product diminishes, thus decreasing the item's status as well. Developers also need to be mindful of the scrutiny by regulators of in-game spending and loot boxes. They are watching closely for potential issues with respect to the price of products rising in importance because of how scarce the seller determines the pricing on the items compared to the actual cost of production. Therefore, the typical market mechanisms that keep a market competitive to ensure that a good/service sells at a fair price are becoming less effective in regulating the cosmetic (i.e., the product that the player purchases) market.
