Video games, industrial organization, price discrimination, behavioral economics
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Despite being one of the youngest forms of entertainment, video games have grown from a relatively niche market into an economic juggernaut, easily eclipsing both film and music in market value. In particular, the global video games industry has doubled in value in under a decade, from an estimated global revenue of approximately $80 billion in 2012 to approximately $160 billion in 2020. In order to better understand the economic principles underlying the rise of the gaming industry over the past decade, this project includes an interview of game developer and industry insider Rami Ismail and an in-depth literature review.
This meteoric growth in revenue reflects two major shifts in the gaming industry. The first was the rise in digital distribution as a replacement for physical media. This digitalization in turn allowed developers to shift away from the traditional business model of one transaction per customer per game, and instead towards a model of games-as-a-service (GaaS) wherein each game continually offers new content for players to purchase.
The standard launch price of premium games has not risen above 60 USD since 2005, with many games costing far less, despite the fact that inflation means that $60 in 2021 is worth much less than $60 in 2005. Customers have shown a strong resistance to price increases, with many even complaining about current prices. As such, firms have had to find additional means of increasing their revenue in order to remain profitable. The most common solution has simply to give gamers more opportunities to pay for the same game. Taking advantage of a microeconomic pricing strategy called price discrimination, many developers have taken to offering additional purchases in order to earn the maximum amount of revenue from the players with the greatest willingness to pay.