rising costs, stagnant prices: how video game companies
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University of Rhode Island University of Rhode Island
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Senior Honors Projects Honors Program at the University of Rhode Island
5-2021
Rising Costs, Stagnant Prices: How Video Game Companies Truly Rising Costs, Stagnant Prices: How Video Game Companies Truly
Earn Profit Earn Profit
Lucas McCulloch [email protected]
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Recommended Citation Recommended Citation McCulloch, Lucas, "Rising Costs, Stagnant Prices: How Video Game Companies Truly Earn Profit" (2021). Senior Honors Projects. Paper 902. https://digitalcommons.uri.edu/srhonorsprog/902https://digitalcommons.uri.edu/srhonorsprog/902
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Rising Costs, Stagnant Prices: How Video Game Companies Truly Earn Profit Lucas McCulloch - Economics/Mathematics
Sponsor: Liam Malloy - Economics
IntroductionVideo games are one of the youngest forms of media, as well as the most lucrative. The global video game industry is almost double the size of the film industry. Both industries have seen budgets for major projects rise as available technology improves, with blockbuster films and AAA games frequently costing several hundred million dollars to produce. However, unlike television and film, where the price of tickets and subscriptions have increased to compensate for inflation and higher production costs, the average price of a video game has failed to do so. In fact, when inflation is taken into account, the list price of games has actually fallen significantly over time. The majority of game consumers respond very poorly to increases in the base price of a game. As such, developers have had to increase their revenue streams through other methods. One of the most common and successful has been the addition of optional and repeatable purchases within the games themselves, a practice known as microtransactions.
The gaming industry has experienced massive growth,fueled in part by the rise of microtransactions Ø Behavioral economics can help explain
why microtransactions are so profitable
Ø Microtransactions can be extremely profitable but must be utilized carefully.
Literature Cited• Harradence, M. (2021, February 03). Sony confirms PS Plus Has 47.4 million Subscribers Worldwide. Retrieved April
18, 2021, from https://www.psu.com/news/sony-confirms-ps-plus-has-47-4-million-subscribers-worldwide/• Koster, R. (2018, January 17). The cost of games. Retrieved April 18, 2021, from
https://www.raphkoster.com/2018/01/17/the-cost-of-games/• Nintendo Co., Ltd. (2020, September 16). Fiscal Year Ending March 2021: Corporate Management Policy Brief.
Retrieved April 17, 2021, from https://www.nintendo.co.jp/ir/pdf/2020/200916e.pdf• Smithers, P. (2020, November 13). 2020 Gaming Industry Statistics, Trends & Data. Retrieved April 18, 2021,
from https://www.gamingscan.com/gaming-statistics/• SuperData. (2021). Superdata: 2020 Year In Review. Retrieved April 17, 2021, from
https://www.digitalmusicnews.com/wp-content/uploads/2021/01/SuperData2020YearinReview.pdf
Acknowledgements
Thanks to my sponsor, Liam Malloy, as well as to Rami Ismail, without whose help this project would not have been possible
Subscription services have steadily risen in popularity
Title Publisher RevenueCall of Duty: Modern Warfare Activision Blizzard $1,913M
FIFA 20 Electronic Arts $1,083M
Grand Theft Auto V Take-Two Interactive $911M
NBA 2K21 Take-Two Interactive $889M
NBA 2K20 Take-Two Interactive $771M
Call of Duty: Black Ops Cold War Activision Blizzard $678M
Animal Crossing: New Horizons Nintendo $654M
Cyberpunk 2077 CD Projekt $609MSims 4 Electronic Arts $462M
DOOM Eternal Bethesda Softworks $454M
Title Publisher(s) RevenueHonor of Kings Tencent $2.45B
Peacekeeper Elite Tencent $2.32B
Roblox Roblox Corporation $2.29B
Free Fire Garena $2.13B
Pokémon GO Niantic, Nintendo $1.92B
League of Legends Riot Games, Tencent $1.75B
Candy Crush Saga King, Activision Blizzard $1.66B
AFK Arena Lilith Games $1.45BGardenscapes –New Acres Playrix Games $1.43B
Dungeon Fighter Online Nexon $1.41B
Top 10 Premium* Titles by Revenue, 2020 Top 10 Free-to-Play Titles by Revenue, 2020
*Shaded titles are those without any form of paid add-on content
Free-to-play revenue significantly higher than premiumThe gap between what it costs to make a game and what consumers actually pay for it is widening. Games become more expensive to make as the amount of content in them increases, but list prices have failed to rise accordingly.
Source: Raph Koster
Nintendo Switch Online Members Over Time
Over 15 Million members as of January 2020Over 26 Million members as of September 2020
Source: Nintendo
Source: Superdata
Pros• Fund other games• Cheaper to make than an entirely new
game• Continuous• Positive network effects• Customers pay as much as they are willing
Cons• Manipulative• Link to gambling and addiction• Market saturation• Negative reputation• Can give “unfair advantages” to certain
players
Heuristic Effect
Default Effect• Once signed up, consumers are unlikely
to cancel an automatically recurring subscription
Gambler’s Fallacy• After repeated failures in a game of
chance, players expect the odds of success to rise.
Hedonic Adaptation
• People tend to return to a base level of happiness. Even if customers initially satisfied with a purchase, they will likely later want more.
Reference Dependence
• Both games and add-ons frequently go on sale. Consumers see the sale price as a gain when compared to the reference point of the original price.
Scarcity Heuristic
• In-game items (and recently, entire games) are often only available for a limited time, creating demand by creating a perception of scarcity.
Zero Price Effect• The perceived value of a good is
greater when free than when it has a cost of slightly more than free.
*2020-2022 are projected estimates