Economics study finds volume discounts don't increase profitability for video game

July 8, 2016 by Mark Peters, University of Chicago
Quantity discounts presented to customers across treatment arms. Credit: Steven Levitt and John List

Discounts tied to buying large quantities of virtual goods have little impact on profitability and do not increase the number of customers making purchases, according to economists at the University of Chicago.

The findings come from a field experiment of more than 14 million players of mobile games by King Digital Entertainment, maker of Candy Crush Saga. For the study, researchers offered a range of quantity discounts on , which players buy for use within a video game.

The results of the study by UChicago economists Steven Levitt, the William B. Ogden Professor of Economics, and John List, the Homer J. Livingston Professor of Economics, were published on July 5 in Proceedings of the National Academy of Sciences. Co-authors of the paper were Susanne Neckermann, an assistant professor at Erasmus University, and David Nelson of King.

"I think there is a lot to gain from partnerships between cutting edge firms and academic researchers," Levitt said. "Many firms are now doing randomized experiments, but mostly testing incremental changes. This project was an example of using experimental methods to test a much more radical shift in strategy."

The researchers and King conducted the together, with the results made available to the scientific community. Such partnerships remain rare, but hold increasing value in an era of big data in which companies generate large, real-time data sets.

"A good way to define firms is that they are a black box where interesting economic facts reside," List said. "Experimental partnerships with firms allow scientists to unlock these deeply held mysteries."

King's games for smart phones, tablets and other devices are free to users. The company generates revenue through in-game purchases such as gold bars, which can be redeemed to advance more quickly through a game.

Traditionally, King has used a simple pricing strategy with minimal discounts for buying large quantities of gold bars. For the study, researchers designed a series of quantity discounts, which were offered to different groups of customers for a three-month period. In the most extreme intervention, players were offered a more than 60 percent discount for intermediate-size purchases and a more than 70 percent discount for large-size purchases.

Analysis of players' responses to the discounts show that:

— Quantity discounts had virtually no effect on the share of players making a purchase.

— Customers who made small and infrequent purchases tended to spend more when offered the largest quantity discounts, while customers who were already large buyers tended to spend less. The net result was no impact on revenues or profit.

— Data suggests some consumers who would have made small purchases were discouraged from doing so when faced with large quantity discounts.

The researchers said their findings challenge traditional theoretical thinking on quantity discounts, particularly that such practices increase company profitability. The experiment came at essentially no cost to King, requiring a minimal number of employee hours to execute.

Explore further: Verizon offers discounts under installment plan

More information: Steven D. Levitt et al, Quantity discounts on a virtual good: The results of a massive pricing experiment at King Digital Entertainment, Proceedings of the National Academy of Sciences (2016). DOI: 10.1073/pnas.1510501113

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Eikka
not rated yet Jul 08, 2016
Selling "digital goods" as if they were physical goods with a per unit cost is the biggest scam of the modern society.

It's a similiar scam to charging per byte for internet access, as if the copper wires or fiberoptic cables wore out from the torrent of data.

Edenlegaia
not rated yet Jul 09, 2016
Selling "digital goods" as if they were physical goods with a per unit cost is the biggest scam of the modern society.

It's a similiar scam to charging per byte for internet access, as if the copper wires or fiberoptic cables wore out from the torrent of data.



Depends. You're in search of the Ultra Rare game you can't find anywhere. No physical copy of it, or only at abominous prices on the net.
Suddenly, Skeam (heh) releases a digital copy of that game you almost gave up on possessing.
It's here.
It costs 19$. The physical copy, when it was still available, wouldn't be found under 45$.
Scam? You can dive in it.
Eikka
not rated yet Jul 11, 2016
Scam? You can dive in it.


It is still a scam. It's holding the game - which is long since made and paid off to its authors - at ransom. The "Skeam" service is simply rent-seeking on other people's work, like a person who puts a chain over a bridge somebody else built and paid for, and starts asking for money to let you through. Nobody owes him anyhing, and he's simply causing harm by obstructing traffic, so the right thing to do would be to take down the chain and throw the guy in prison.

The real scam is in the legislation that pretends people and corporations have the "right" to do this because they "own" some abstract idea and a piece of information to almost in perpetuity as if it was a physical object that can be owned.

If so, please give me the hole of a donut - not the donut itself - or put the interval between two musical notes in your pocket. Can't do that? That's because it's total nonsense. You can't own what you can't have.
Eikka
not rated yet Jul 11, 2016
Indeed, in the case of copyrights, nobody actually owns the game or the music, or the movie; what they have is the -right- to it.

Some piece of paper or computer record somewhere lists that A belongs to B, which simply means B can charge money off of C. It's got nothing to do with actual ownership of anything, but simply arbitrary and fictious legal rights that we pretend exist because there's a whole lot of people making a whole lot of money off of everyone else because of it. Not even the people who came up with the "A" in the first place, but simply and mostly people who have cheated or bought themselves the rights to it and doing tremendous harm to the society by gobbling up enormous amounts of wealth to themselves giving nothing in return.

They give less than nothing because they simply obstruct access to what already exists - just like blocking off a bridge or standing in front of a public intersection demanding a dollar to let pass.

Well, what if we stopped pretending?
Eikka
not rated yet Jul 11, 2016
The fundamental problem with selling "intellectual property" is that it's worthless.

If I buy a fancy stone for a dollar, does that mean the stone is worth a dollar and I should get my money back? No it doesn't. It depends on if anyone else wants that stone more than they want one dollar.

So we apply the same idea to the video game, and say if people want it more than they want their dollar, they should give the dollar. However, that does not account for the fact that there is only ever going to be that one particular stone that must change hands, whereas the video game never changes hands. It remains, becoming duplicated in transaction.

So if we judge the value of the video game to be a dollar because that's what people pay for it, we must argue that we're getting more and more value every time someone buys a copy of it, which is absurd. There's no more value added because it's the same video game all along.

There's no more of it and everyone paying is being cheated.
Eikka
not rated yet Jul 11, 2016
Oh, but you can claim that there is indeed more value being added by the utility of having a copy of the video game. Say, it makes me happy, and I'd rather be happy for an hour than own a dollar so the exchange was justified.

But the utility value of the video game has nothing to do with the original rights-owner. What other people do with the game, what it results in, is no part of the contract between the seller and the buyer any more than a hardware shop owner is owed a share of profit out of the houses built with the hammers he sells. The value added belongs to the carpenters, not the shopkeeper.

So what is the value of the video game? Nothing more than the cost of getting it made, however much the author agrees to make it for, and beyond that no more should be paid by anyone.

If you say for a price "infinite" or "keep it coming" as it is with the current copyright scheme, it should be a pretty damn awesome game for anyone to reasonably agree.
hangman04
not rated yet Jul 11, 2016
Makes total sense... Lets say the company sells usually in-game currency 1 gold / diamonds / etc for $1, normal price. You will have people who wont pay at all, casual buyers who usually have a budget on monthly basis ( and whales who are limited not by their money but by the how much they can spent in the game daily (in most games you can buy various things but almost all limited on a day / week / etc basis.

Then you have a discount offer like : 10g for $8. At best type I players will be temped to make 1 time purchase. Maybe type II will buy in advanced for next periods but overall their spending will be the same, but type III won't buy more gold since they know they don't need it anyway, since their cap is not money but game consumption.

And the worse thing for the company is that in the players mind 80 cents for a 1G will be the new normal and they will probably w8 for next similar offer or a lower one....

Usually it's not discounts that drive sales but new game content.

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