Multi-player online games : pricing strategies of high-tech network goods

Abstract

The rapid growth of broadband internet access around the world has lead to the emergence of Multiplayer Online Games (MPOGs). MPOGs are computer games where players interact socially online. Most firms providing these games traditionally followed a two-part tariff pricing model; this is due to the large network externalities involved. Recently, we observed many new games abandoning this traditional model in favour of the "free to play" model and selling optional credit points for players who want to buy virtual items. Virtual items are add-on items which gamers can buy to enhance their gaming experience. The purchase of virtual items is not compulsory; gamers can in fact play the game for free without purchasing any items. In this paper, we examine the credit-point (or virtual-item) pricing model by a monopolistic firm with an economic theory framework. We first ask the questions: “Is this credit-point model profitable? And which pricing model is more profitable?” We found that the opportunity costs for gamers must be sufficiently low for such a free-to-play pricing model to be profitable to the firm, and that choice of credit-point or two-part tariff model depends on the magnitude of its marginal cost of producing the game. Next, we investigated how the choice of advertising influences market decisions. We found that firm should choose a positive amount of advertisement when the cost of advertisement is low enough, and that the expensive-to-produce game is more likely to get advertised than the cheap-to-produce game.