Freemium Pricing in Digital Games with Virtual Currency

36 Pages Posted: 1 Mar 2018 Last revised: 13 Sep 2019

See all articles by Zixuan Meng

Zixuan Meng

University of Washington - Michael G. Foster School of Business

Lin Hao

Fordham University - Gabelli School of Business

Yong Tan

University of Washington - Michael G. Foster School of Business

Date Written: February 20, 2018

Abstract

Providers of free-to-play games often gain revenue by monetizing players’ playtime, e.g., through ingame advertising, and by selling premium module of the game. One emerging strategy to sell the premium module, known as the virtual selling strategy, is to set the module price based on an amount of virtual currency which players can either spend playtime to earn or use real currency to buy. In this paper, we examine how the virtual selling strategy leads to different market outcomes than the traditional real selling strategy where players can purchase the premium module using real currency directly only. We focus on the differences caused by one specific feature – players can pay for the module indirectly using their playtime in the virtual selling strategy. We show that when the provider’s efficiency of monetizing players’ playtime, i.e., the time revenue rate, is above a threshold, the virtual selling strategy will benefit the provider and hurt the overall consumer surplus compared to the real selling strategy even though (i) the virtual selling strategy results in reverse price discrimination in the market equilibrium and (ii) players in the virtual selling strategy have one additional way, i.e., using their playtime, to pay for the module. We identify an undocumented complementary effect which causes the profit augmentation under reverse discrimination and the surplus reduction. The complementary effect also results in a U-shaped relationship between the equilibrium module price and the time revenue rate in the virtual selling strategy when the module only provides a small number of new gaming stages. It contradicts the traditional result from the real selling strategy that the provider shall reduce the module price when she becomes more efficient in monetizing players’ playtime.

Keywords: freemium model, ad-sponsored model, digital games, virtual currency

JEL Classification: M15, M31

Suggested Citation

Meng, Zixuan and Hao, Lin and Tan, Yong, Freemium Pricing in Digital Games with Virtual Currency (February 20, 2018). Available at SSRN: https://ssrn.com/abstract=3127091 or http://dx.doi.org/10.2139/ssrn.3127091

Zixuan Meng (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Lin Hao

Fordham University - Gabelli School of Business ( email )

140 West 62nd Street
New York, NY 10023
United States

Yong Tan

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3226
United States

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