Value of game user base to players : estimating the effect of direct network externalities on the demand of massively multiplayer online role-playing games.

Abstract

Massively multiplayer online role-playing games (MMORPGs) have gained increasing popularity around the world. MMORPGs are distinct from traditional video games because they can host large social networks, since the games allow a vast number of players to play and interact with other players simultaneously. Therefore, MMORPGs are network products and are influenced by network externalities—the value of a game to a player increases as the size of the game user base grows. This study aims to empirically examine direct network effects on the market demand of individual MMORPGs and thereby provide insight into the value people place on social networks. According to conventional economic wisdom (the law of demand), the lower the price, the more the units of the product are in demand. But when products exhibit network externalities, the network-value effect of a larger user base has a positive impact on the demand. This should moderate the conventional inverse price-quantity relationship—a hypothesis this study investigates. An empirical model is devised to estimate the game-specific demand for MMORPGs taking into account both the network effect and the price effect of the installed user base. A sample of 122 released MMORPGs is tested, utilizing data on the website MMORPG.com. The estimation shows a negative price-quantity relationship in the demand function, with or without the perceived value of the game’s network size separately controlled for.