Pricing and Addiction Control for Digital Services

Abstract

The significant usage of digital services such as video games and video platforms has spurred societal concerns about digital addiction. Unlike traditional addictive goods, these services allow for personalized dynamic pricing based on user engagement and exhibit a wider variance in user experiences. Despite emerging research on digital addiction from empirical and behavioral perspectives, there remains a gap in understanding the influence of pricing and addiction control policies from a theoretical standpoint. This study presents the first analytical exploration of pricing strategies and control measures for addictive digital services, with the objective of providing firms and policymakers with insights to address digital addiction while maintaining profitability. Utilizing dynamic programming that accounts for users' habit-forming behavior, we characterize and compare optimal fixed and dynamic pricing across various scenarios. Our results indicate that dynamic pricing not only enhances profits but also mitigates long-term addiction, thus benefiting both firms and users. Similarly, we also find that one-time promotions for new users initially increase addiction but lead to a reduction over time. We then examine three addiction control policies: consumption limits, price floors, and consumption taxes. By comparing the profit-addiction efficiency of these policies, we find that a consumption limit or tax could be most efficient, with the experience variation being a crucial factor. A numerical case study demonstrates that, compared to fixed pricing, dynamic pricing could yield a 3.07-3.73% profit increase and a 1.31% addiction reduction, or no profit loss and a 20.65-22.16% reduction in addiction when combined with additional control measures.

Keywords: Addiction, Digital Platforms, Video Games, Dynamic Pricing, Habit Formation