Price Discrimination and Big Data: Evidence from a Mobile Puzzle Game

Abstract

We use data from a mobile puzzle game to investigate the welfare consequences of price discrimination. We rely on experimental variation to characterize player behavior and estimate a model of demand for game content. Our counterfactual simulations show that the game developer's observed pricing is far from optimal. Profit would increase by 340% if the game developer used optimal uniform pricing instead. What is more important, our results suggest that optimal uniform pricing results in almost the same increase in profits as first-degree price discrimination (347%). All pricing strategies considered---including optimal uniform pricing---induce a transfer of surplus from players to game developer without, however, generating sizeable dead-weight losses.

Keywords: Price discrimination, personalized pricing, mobile apps, online games, freemium

JEL Classification: D40, L11