On Videogame Pricing Models (Or: Jason Rohrer isn’t an Economist)

Indie developer Jason Rohrer recently published an editorial on Gamasutra arguing that game prices should rise, not fall, after release dates. It’s an interesting concept, but Rohrer’s reasoning for the shift is flat-out wrong, a misinterpretation of the phenomena that he claims bolster his argument.

indie developer Jason Rohrer at the Game Developers Conference 2011

indie developer Jason Rohrer at the Game Developers Conference 2011

The current model has games released for their full MSRP, typically $60 for a big-budget game. After the first month’s sales, where the bulk of revenue is made, price drops and sales will periodically occur to clear out inventory, gain additional revenue, and reach audiences who aren’t willing to pay $60 but might fork over $40, $30, or $20.

Rohrer feels that there are several flaws with this model:

  • Gamers are incentivized to wait on purchases, knowing that price drops will eventually come. A game’s launch week is thus relatively weaker.
  • The expectation of price drops and sales effectively “decimat[es]” a game’s community, since many would-be buyers wait; the player community is weaker as a result.
  • Early adopters who pay full-price are “kick[ed] in the teeth” by sales and price drops; a game’s most avid fans are cheated by having to pay more
  • Sales, in his opinion, reduce revenue in the long run.

On its face, nothing is inherently false here. Many consumers (myself included) may hold off purchases until price drops or sales. Those who argue against a state’s sales tax holidays (a perennial debate in Massachusetts) use this same reasoning: the holidays don’t increase spending; they merely concentrate it into a specific timeframe. It’s also possible that consumers may regret spending $60 on launch day if they see price drops shortly thereafter.

In this system’s stead, Rohrer proposes periodic, publicized price increases that would reward early adopters and generate sales spikes before the increases. He uses Minecraft and Garry’s Mod as supporting examples; Minecraft, developed by Mojang AB, has achieved massive success despite gradual price increases since its alpha release, and Garry’s Mod’s daily purchase volume has trended upward since it first launched in 2006.

Unfortunately, Rohrer’s suggestion, while curious (like the concept of Giffen goods), runs counter to economic reasoning, and his examples are unique cases that can’t be used as models.

Garry’s Mod is simply a game that has remained at a constant price of $10 and has been discounted during Steam sales. The game’s growing long-tail sales are due to its popularity and accompanying network externalities. It doesn’t support Rohrer’s argument at all.

Rohrer doesn’t recognize why Minecraft, in particular, has succeeded. The game was a phenomenon, and its widespread popularity led to huge network externalities. As its community grew, its value increased; the game was worth more. Its sudden (and enduring) popularity was a change in consumer preferences. In short: its demand curve shifted.

500px-Supply-demand-right-shift-demand.svg

With that shift, its equilibrium price – the sweet spot where Mojang could maximize revenue – increased, so Mojang dutifully increased Minecraft’s price to take advantage of it. This isn’t a case for revolutionizing the videogame pricing model. It’s Economics 101.

—————————

Another concern Rohrer raises is that price drops and sales are a “kick in the teeth” for early adopters. To quote his editorial:

Even in economic terms, the extra utility of playing the game early, at release, is not big enough to offset the extra cost for most people

(Source)

The amusing aspect of this assertion is that Rohrer’s own experience as a developer proves him wrong, and blatantly so. Consumers are reasonably well informed, and they know that there will be price drops in the coming months. The fact that they still choose to purchase a game at full price shows that, in economic terms, the utility of playing the game early outweighs the savings they would make by waiting.

Price drops occur for two reasons:

  1. For brick-and-mortar retailers, it’s important to clear out inventory
  2. They enable publishers/developers to net additional revenue from consumers whose willingness to pay is below the $60 MSRP.

While Reason #1 doesn’t apply to an online service like Steam, Reason #2 is common sense. A developer can either choose to just get launch day revenue… (see picture below)

Game Demand Curve Graph

…Or it can choose to gain additional revenue, grow and rejuvenate the player community, and reach consumers who can’t or won’t pay $60 by instituting price drops:

Videogame Revenue with price drops

Rohrer’s last assertion, that Steam-like sales reduce overall revenue, has yet to be proven or disproven. That’s a question for econometric analysis, and those analyses either have yet to be done, cannot yet be done, or simply aren’t available to the public. Certainly there is variation in the industry; major publishers like Activision and EA use price drops with predictable regularity, whereas Nintendo is well known for leaving games at their MSRP for years. Each has their advantages, but nowhere is Rohrer’s assertion supported.

Rohrer is going to implement his proposed pricing model with his upcoming release The Castle Doctrine. Hopefully the game will be a financial success, but even that case, given the unusual PR Rohrer has generated with his editorial, cannot necessarily be taken as conclusive evidence one way or the other.

On an endnote: Rock, Paper, Shotgun has its own editorial questioning Rohrer’s idea. It addresses different points, particularly the culture around Steam sales, and it’s worth a read.

Advertisements

9 responses to “On Videogame Pricing Models (Or: Jason Rohrer isn’t an Economist)

  1. Greetings,

    I think what Mr. Rohrer was attempting to focous upon was upon a price gouging narrative. Such a narrative implies that there is an oligopoly or monopoly, which in this case is not exactly true to begin with. In fact I woulda argue that for the most part it is absurd, in the case of independent ‘indie’ games I would think that for the most part is is a monopsony; if customers are unwilling to pay the subscribed price there are other games or….other avenues.

    Of course the notion of price increases might work if early adopters have guarantees, which almost no developer save for those that are Kickstarted; though even that there is a certain halting point.

    A well written and interesting article by the way.

    • Thank you! I’m glad you enjoyed it.

      Price gouging implies that exorbitant prices are being charged because of a supply shortage or unfairness, and supply is infinite on an online service like Steam. Because of that, I don’t think Mr. Rohrer was referring to price gouging. His sentiment is that it’s wrong to make one’s most loyal fans pay the most, but that’s just how things are. Willingness to pay, etc.

      You bring up monopsonies – it’s interesting, but I’m not sure if it holds. At best, a consumer can only choose not to purchase anything. To be a monopsony, an individual consumer would need to be able to influence game prices, but no purchaser possesses that kind of market power. (Maybe Gamestop does, but that’s only within the realm of brick-and-mortar retailers. They’re still required to price games at whatever the publisher decides.)

      • I think Mr. Rohrer seems to believe the developers are being price gouged indirectly, a sort of reverse price gouging so to speak; of course that is purely speculation on my part I admit.

        In regards to the monopsonies I would make that argument gamers have the opportunity (and unfortunately do) exercise the option to acquire games that undercuts both developers and publishers.

        The only reason it does not necessarily factor in right now is due to the fact that a majority of consumers do not mind necessarily paying for their games…up to a point of course.

        If Mr. Rohrer’s suggestions were put into place then I suspect that there would be a development of a pirate economy.

      • How can it be price gouging, though? On the indie side, developers must consent to putting their games on sale. They also choose how much to discount their games. On the AAA-side, publishers intentionally institute price drops. If they thought the long-term revenue from full-priced games would beat the effects of short-term sales, then price drops and sales wouldn’t exist.

        Second, I see where you’re going with piracy, but I think you’re going a bit overboard. Piracy isn’t a legitimate market action; it’s a subversion of the market. You’re assuming that people engage in piracy as an act of protest against ‘high prices’. That’s not necessarily true for even a token minority of pirates.

      • I generally tend to think that Indie developers feels pressured to reach the maximum number of customers and, they feel the only feasible way to do so is through Steam; in which case Steam can indirectly dictate prices. If Steam believes its highest priority is its customers whom want games for low prices, the indie developers will then basically be ‘encouraged’ to lower their prices lest they face piracy. Of course this assuming that Valve has backdoor practices but indeed what company does not?

        As to piracy, Charles Cecil of Revolution Software argues that piracy is a natural reaction to high prices. There as an interesting blog on Gamasutra by Adam Moore noting on how Gamestop increased its revenue by selling discounted games, noting that in a recession people are less than willing to shell out money for games priced at sixty dollars and upwards.

      • Mr. Rohrer stated explicitly in his editorial that Valve doesn’t pressure developers or publishers to participate in Steam sales. One should be able to take him at his word. Regarding Mr. Cecil, he didn’t offer data to support his argument, so his words are little more than that.

        Finally, Gamestop generates a lot of its profits by selling used games, which are typically sold at a discount compared to new copies. It’s not surprising that in a recession, people buy cheaper, used games, but nor is it scandalous.

      • While Mr. Rohrer does clearly state that Steam does not indeed pressure developers on their prices, Steam does suggest price points at time as David Galindo mentions in his blog post entitled ‘How much do indie PC devs make, anyways? (Part V)’. This is a story with a rather happy ending admittedly, though I am just waiting for the point where the ‘suggestions’ become the iron hand in a velvet glove.

        As to the Gamestop my point is that there is a school of thought that believes that price is one of the key factors in piracy. The issue of course when discussin piracy is that there has never really been a direct study on the causes for piracy, merely anecdotal evidence most of the time. Mark Langshaw has an interesting article/interview where one of the developers of Motorstorm mentions that one of the reasons for piracy are the prices. This is why a number of firms are switing to F2D, with ads or other avenues.

        Regardless this will be my last posting in regards to this topic due to the fact that I believe I may have diverted the comments away from the actual blog post itself. Apologies for that.

        Thank you for the discussion and, again a good read.

  2. I was thinking about writing a post on Rohrer’s sale issues from a similar perspective, but looks like you beat me to it 🙂

    I think Rohrer’s really oversimplifying a lot of matters here, both business-wise and of the very nature of the games he’s talking about. Minecraft, whose prices only increased as the product progressed through pre-completed stages and hasn’t changed but for the occasional sale since becoming a full game, and Garry’s Mod, which seems to hold far more value for its players as a creation utility than as a game, are in quite different circumstances than The Castle Doctrine. And while I haven’t seen the stats to back it up, assuming that well more than half the people who buy a product on sale would be completely willing to buy it at full price under other circumstances just seems like nonsense to me.

    I’m interested in seeing how Rohrer’s experiment works out, but as is he seems to be approaching this issue with a very limited perspective, one that tries to break complex issues down to their simplest forms rather than look at them for what they are, and I can’t say I’m expecting much long-term good out of it.

    • We’re in the same boat, then. In any case, it’ll be interesting to see what comes of this. Rohrer talks about long-tail sales in his editorial, yet he might be setting himself up for a cliff drop.

      I’m not too familiar with Minecraft or Garry’s Mod beyond friends’ remarks, so what you’re saying adds more depth. It would make sense for the price to increase as Minecraft becomes more and more complete, and if Garry’s Mod is more a software application than game, then it wouldn’t have to conform to a game’s sales pattern either.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s