Thursday, December 22, 2005 - The Progress & Freedom Foundation Blog

Gaming Price Discrimination

Mike Musgrove has a column in the WashPost on "walk throughs" or highly detailed directions to guide video game players through every puzzle, trap and situation of their favorite video games. It may be a clip-n-save for anyone expects to need a little help next week with the latest additions to the household video game collection.

While the column is ostensibly about the guides - many of which run hundreds of pages and are available for free on the Internet - there are some subtle points made about the economics of information goods.

First, the market for game guides is bifurcated and possible fragmented into several segments based on reputation, quality and price. On this last component, search cost is proxy within the market segment that has a price of zero. Among all game guides that are free, the easiest to find and download have the "lowest" price. Of course, there is a virtuous circle. The more popular guides and the higher quality guides create buzz and are posted at the sites with the highest reputation.

Consider this excerpt from Musgrove:

For those players who want more than an amateur-written text file, there are also professionally published game guides that typically cost about $20 each. That's about a $100 million business, according to one publishing company, BradyGames, which competes with a company called Prima in putting out slick, full-color books that include level maps and other bonus material. These publishers pay game developers a royalty for each book sold.

Although such guides benefit from having the cooperation of game developers, players who need just a little help often find that the free stuff is good enough.

The second point seems a bit more interesting to me. Often overlooked when we discuss information goods - especially those like software or games where marginal costs decline so precipitously toward zero - is that successful producers often collect revenues from multiple sources. Accessories, peripherals, service contracts and guidebooks are all examples of this phenomenon. In the excerpt above, we see that game producers make money from the sale of the good and then receive secondary revenue from a segment of their consumers in the form of royalties from publishers of game guides. The game and guide producers symbiotically help grow the size of the gaming marketplace. Nearly a decade ago, Carl Shapiro and Hal Varian wrote about this phenomena in their book Information Rules. When segmenting a market for price discrimination, it is usually most profitable if you can get the consumers to select their choice - game plus guide or just the game - for you. From the producers' perspective, it eliminates the costs of identifying and marketing to a target population.

It is an extreme understatement to observe that the complexity of gaming has increased in the past few decades. To take just one example, today there are secondary markets for virtual goods which are developed within the virtual world of games. As a child, I never would have been able to "buy" a new city for my Atari Asteroids on eBay. Today, this type of transaction is commonplace. One result of this increased complexity in gaming and the marketplace is a corresponding increase in the level of commitment required by gamers to succeed with their avocation. Unsurprisingly, the market for guides has emerged in response to the demands of the least committed gamers (or those with the highest opportunity cost of time.)

posted by @ 12:44 PM | E-commerce , Economics , IP , Software