Freemium Pricing in Digital Games with Virtual Currency
36 Pages Posted: 1 Mar 2018 Last revised: 13 Sep 2019
Date Written: February 20, 2018
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: Suggested Citation