University of Rhode Island DigitalCommons@URI

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5-2021

Rising Costs, Stagnant Prices: How Video Game Companies Truly Earn Profit

Lucas McCulloch [email protected]

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Part of the Behavioral Economics Commons, and the Industrial Organization Commons

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

This Article is brought to you for free and open access by the Honors Program at the University of Rhode Island at DigitalCommons@URI. It has been accepted for inclusion in Senior Honors Projects by an authorized administrator of DigitalCommons@URI. For more information, please contact [email protected]. Rising Costs, Stagnant Prices: How Video Game Companies Truly Earn Profit Lucas McCulloch - Economics/Mathematics Sponsor: Liam Malloy - Economics

The gaming industry has experienced massive growth, Introduction Ø Behavioral economics can help explain Video games are one of the youngest forms of fueled in part by the rise of microtransactions media, as well as the most lucrative. The global why microtransactions are so profitable video game industry is almost double the size of the film industry. Both industries have seen Heuristic Effect budgets for major projects rise as available technology improves, with blockbuster films and • Once signed up, consumers are unlikely Default Effect to cancel an automatically recurring AAA games frequently costing several hundred subscription million dollars to produce. However, unlike • After repeated failures in a game of television and film, where the price of tickets and Gambler’s Fallacy chance, players expect the odds of subscriptions have increased to compensate for success to rise. inflation and higher production costs, the average • People tend to return to a base level of happiness. Even if customers initially price of a video game has failed to do so. In fact, Hedonic Adaptation when inflation is taken into account, the list price satisfied with a purchase, they will of games has actually fallen significantly over time. likely later want more. • Both games and add-ons frequently go The majority of game consumers respond very Reference on sale. Consumers see the sale price poorly to increases in the base price of a game. As *2020-2022 are projected estimates Dependence as a gain when compared to the such, developers have had to increase their reference point of the original price. revenue streams through other methods. One of Subscription services have steadily risen in popularity • In-game items (and recently, entire games) are often only available for a the most common and successful has been the Scarcity Heuristic addition of optional and repeatable purchases limited time, creating demand by within the games themselves, a practice known as creating a perception of scarcity. Nintendo Switch Online Members Over Time • The perceived value of a good is microtransactions. Zero Price Effect greater when free than when it has a cost of slightly more than free.

Ø Microtransactions can be extremely profitable but must be utilized carefully. Pros • Fund other games • Cheaper to make than an entirely new game Over 15 Million members as of January 2020 • Continuous Over 26 Million members as of September 2020 Source: Nintendo • Positive network effects • Customers pay as much as they are willing Cons Free-to-play revenue significantly higher than premium • Manipulative Top 10 Premium* Titles by Revenue, 2020 Top 10 Free-to-Play Titles by Revenue, 2020 • Link to gambling and addiction The gap between what it costs to make a game and what • Market saturation consumers actually pay for it is widening. Games become Title Publisher Revenue Title Publisher(s) Revenue • Negative reputation more expensive to make as the amount of content in them • Can give “unfair advantages” to certain Call of Duty: increases, but list prices have failed to rise accordingly. Activision Blizzard $1,913M Honor of Kings Tencent $2.45B Modern Warfare players Peacekeeper Elite Tencent $2.32B FIFA 20 Electronic Arts $1,083M Roblox Roblox Corporation $2.29B Grand Theft Auto V Take-Two Interactive $911M Free Fire Garena $2.13B NBA 2K21 Take-Two Interactive $889M Literature Cited • Harradence, M. (2021, February 03). Sony confirms PS Plus Has 47.4 million Subscribers Worldwide. Retrieved April Pokémon GO Niantic, Nintendo $1.92B 18, 2021, from https://www.psu.com/news/sony-confirms-ps-plus-has-47-4-million-subscribers-worldwide/ NBA 2K20 Take-Two Interactive $771M • 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/ Call of Duty: Black League of Legends Riot Games, Tencent $1.75B • Nintendo Co., Ltd. (2020, September 16). Fiscal Year Ending March 2021: Corporate Management Policy Brief. Activision Blizzard $678M Retrieved April 17, 2021, from https://www.nintendo.co.jp/ir/pdf/2020/200916e.pdf Ops Cold War King, Activision • Smithers, P. (2020, November 13). 2020 Gaming Industry Statistics, Trends & Data. Retrieved April 18, 2021, Animal Crossing: Candy Crush Saga $1.66B from https://www.gamingscan.com/gaming-statistics/ Nintendo $654M Blizzard • SuperData. (2021). Superdata: 2020 Year In Review. Retrieved April 17, 2021, from New Horizons AFK Arena Lilith Games $1.45B https://www.digitalmusicnews.com/wp-content/uploads/2021/01/SuperData2020YearinReview.pdf Cyberpunk 2077 CD Projekt $609M Gardenscapes – Playrix Games $1.43B Sims 4 Electronic Arts $462M New Acres Acknowledgements Dungeon Fighter DOOM Eternal Bethesda Softworks $454M Nexon $1.41B Thanks to my sponsor, Liam Malloy, as well as to Rami Ismail, without whose help this project would not have Online been possible *Shaded titles are those without any form of paid add-on content Source: Superdata Source: Raph Koster