Price Discrimination vs. DLC

YouTube user ShoddyCast is one of my favorite channels o'er yonder. For one, he is obsessively, charmingly pedantic about minor video game physics inconsistencies. For two, he cusses like a middle school boy. These are qualities I can't help but admire. But consider this recent foray into economics (featuring Richard Thaler, no less):



He gets several points absolutely correct. Game (and console) pre-orders work well for physical media, so long as the quantity demanded on or around release date is unpredictable. I recall some trouble landing a copy of Silent Hill near its release date, for example. And since I'm the sort of gamer who likes to play a few favorite franchise titles right away, this was irksome. Or maybe it was vexing. Irritating? Whatever the sensation, pre-orders purported to ease the problem. I was promised to no longer be confounded on release day. I was guaranteed a physical copy in my hot little hands. Because I'm the type of player for whom that is important.

Another point he gets right is the time value of money. Unfortunately, he gets it right for the wrong reasons. $60 today is indeed worth more to me than $60 a year from now, but that's true even without inflation. And it's even true without the explicit opportunity cost of foregone investment.

Perhaps I should pause for a moment to cover the concept of opportunity cost. Here's the superlative David Henderson on the topic. Opportunity cost is the [subjective] value of the next-most attractive alternative. In the case of the Fallout 4 season pass (at the original price), the $30 I dropped would have bought me 3 pizzas from my favorite local pizzeria (Tuesdays are buy one, get one free at Brick Pizza). For putting money into a lockbox, the alternative uses could include a couple extra shares in an ETF or an interest-bearing savings account (good luck finding one), but it doesn't have to. All that's needed to show the opportunity cost of holding cash is that you're restrained from spending it. Something might come along that you value more than that thirty bucks, but too bad, Sally. It's out of reach. Better luck next time. You might recognize this as a component to our good friend the regret condition.

He also mostly gets Thaler right. At most department stores, prices on the sale racks are still above the cost of goods sold. Therefore, the full markup price is absurdly, unreasonably high. This sales tactic relies on a cognitive illusion: you think you get a screaming deal on a pair of trousers for $20 because on another day, they might have sold for five times that price. You shake your head and pity the poor sucker too unlucky to shop on that particular day and walk off proud of your shopping acumen. But here's the curious thing: every so often, trousers are indeed sold at full retail price.

What gives? Are these spendthrifts actually behaving irrationally?

What we have here is a yes, if/no, but situation. It is indeed classically irrational to pay full price for something if the lower price is predictably available and if the opportunity cost of waiting for it is lower than the price differential.

Let me give you a quick example. One day, I was scheduled to teach an early morning Public Choice class. My favorite parking spot on campus is a seldom-used dirt and gravel lot near the football pitch on the west side of Patriot Circle. If you know the GMU campus, it's across the street from the hotel (which I think is now closed). Being a brisk early spring morning, the nearby hill that I often used as a shortcut was slick with dew. When I attempted to carefully plot my way down the hill, I lost my footing, went ass over teakettle, and completely ruined my slacks. I had a big ol' mud streak all the way up my left leg. With class starting in 20 minutes, I needed a new pair of pants, pronto. I hopped back into my car, hightailed it to a TJ Maxx, bought what I needed, and tore ass to Robinson B just in time to start my lecture on the Condorcet Paradox. In other words, I had very high opportunity costs thanks to the urgency of my shopping excursion. I was willing to pay more for convenience and speed.

So is it classically irrational to pay full price under normal situations? No, not as long as you can't adequately predict the pattern of future prices. What you're doing by pre-paying is essentially buying a call option. You put your money down now in the expectation that future prices will either rise (which is exactly what happened with Fallout 4) or that something else will change with your own subjective valuation of the good in question. Farmers do this all the time. If you've ever seen the 80s comedy classic Trading Places, you'll be at least passingly familiar with the Frozen Concentrate Orange Juice futures market. This is just a fancy, centralized method for Florida orange farmers to sell their July crop in February. This is quite a boon to farmers who are more interested in fertilizer and weeds than in the vagaries of global demand. The same idea applies with individual pre-purchases. Buying all the DLC ahead of time is a player's way of betting on expected content expansions.

But, and it's a big but, there exist incentives to gain additional information about the future state of the world. For retail department store sales, Thaler is right on the money: it's common knowledge that department stores have been taking great advantage of silly little cognitive blind spots for ages now. You are indeed a sucker to walk out of a Macy's thinking you put one over on the hapless merchant by buying off the discount rack. With low information costs like this, there's precious little excuse to pay prestige prices. But does a season pass for premium content fit this model?

Maybe. It depends on the publisher. Bethesda is notable for releasing DLC that often exceeds the quality of the base game. After the infamous horse armor incident with Oblivion, they overcompensated by giving us the massive Shivering Isles expansion, Mothership Zeta, Dawnguard, Dragonborn, Broken Steel, on and on. And the four New Vegas expansions (even though it was Obsidian rather than Bethesda) were all as good or better than the base game. Tell me you wouldn't be happy just playing Old World Blues as a stand-alone title. Point is, a long-time Bethesda customer has certain expectations about their add-on content. Incidentally, the same holds true for Borderlands publisher 2K. I felt confident enough that the net present value of all the season pass content for Borderlands 2 exceeded the opportunity cost of biding my time. As it turns out, I was right in that instance. The $30 I spent on that pass was a great deal less than the $60+ I would have had to pay on release day to get Gaige, Captain Scarlett, Mr. Torgue's Campaign of Carnage, and the splendid D&D-themed Assault on Dragon Keep. Recall that for these titles, I am the type of player to pay full price for the pleasure of playing them on or very near their release date.

And that last bit there is really the key to price discrimination. Not all shoppers are created equal. Not everyone is so enamored of fictional universes that they'll rush to get new releases on the day they drop. I'm still somewhat baffled that there can be a new Madden every year that sells extremely well, despite being pretty much identical to the previous year, but for a few roster changes. The same goes for the endless parade of FPS titles. But Fallout? You bet your ass I'm first in line to get the Bloody Mess perk and start exploding super mutants all over that wasteland.

The last component here, is of course, Steam sales. Most big titles will bundle up a Game of the Year edition complete with all the DLC a year or so after its initial release. And another year or so after that, you can usually rely on that GoY edition to go on deep discount in the Steam store during one of their periodic (and predictable!) annual sales. For players willing to wait a while, you can get some screaming deals on titles that have been out for a few years. Well over half my Steam library was acquired this way. This pattern is just as well known, just as predictable as Presidents' Day sales at department stores. However, Steam sales are also just as irrelevant to an impatient fan as Presidents' Day sales are to someone who just skidded down a muddy hill and has to teach a class. I want Far Harbor the day it drops, not a moment later. The opportunity cost of waiting exceeds my desire to play as soon as is reasonably possible.

Long story short, if you're an impatient fan, and you have a pretty good expectation that the forthcoming content will be pretty good, Season Passes can be a pretty good deal. Casual fans or folks less confident about the quality of forthcoming DLC are probably better off holding out for the Game of the Year edition round about Christmas time.

Another decent way of thinking about it is that some folks will pay full price to see a movie on opening night. Are they being irrational when they could simply wait until it gets to Netflix? Why or why not?

Don't Dream It; Be It

Fallout 4, the latest in a wildly-popular post-apocalypse video game series was recently announced. Bethesda, the production studio in charge of the property recently demonstrated some of the new features of the game at the annual Electronic Entertainment Expo, affectionately known as E3. Included in the new features is a detailed crafting system that reminds me of a few of the off-brand voxel-type games we've seen crop up since New Vegas was released. Think Rust or Planet Explorers or even Kerbal. Now, the Fallout series has always had some crafting in it, but it's usually just re-purposing junk to make stimpacks or a pressurized air gun that shoots teddy bears and baseballs at marauders. This new title will allow you to build houses, fortified bases, even entire villages from scrap materials scattered around the wasteland. For anyone who picked up the build-your-own-house DLC in Skyrim, the prospect of homesteading in a big ol' themed sandbox world could well sound like a heck of a lot of fun.

I'm not the only one to think so, evidently.

The #Fallout4 crafting system is cool. Imagine how much cooler it could be if it wasn’t SO focused on building stuff to kill other stuff.

— Feminist Frequency (@femfreq) June 15, 2015

For those of you who don't already know her, the author of that tweet is something of a controversial figure among video game enthusiasts. Reaction to this remark on Twitter was predictably swift and gangrenous. Which is a pity, since Ms. Sarkeesian offers a relatively simple market test: make it.

Create a game without violence as a core gameplay feature. If the game appeals to enough people, you'll make a fortune and be proven correct all in one fell swoop.

Of course, making a game is a risky, expensive, tedious process. Tripe-A titles have eight-figure budgets, putting them below summer blockbusters, but that that far below. Sinking $30 million into a project means giving your customers what they want. You'd better be sure you know what your customers want.

That's the contention though: the customers just should want something different. The question is then how to convince them that 360 no-scoping a Super Mutant isn't as fun as establishing farming colonies and securing trade routes around a bombed-out Boston? Hectoring folks could be one way. Another is to build a better mousetrap.

Still another is the Minecraft route. In Minecraft, you can set the game to "peaceful," which prevents hostile mobs from spawning. If you can turn off enemies in Fallout 4, it'd be more like a grimdark 50s era post-nuke sandbox simulator. Build yourself a nice little rust fort and snuggle in for the nuclear winter.

For the world of entertainment to be more euvoluntary, more inclusive, it's worth thinking about the lowest-cost ways to please the most customers. Open-world, sandbox style games have the decided advantage that many of the parameters of the game are just that: parameters, and they can be adjusted simply. Just let players access the settings. If you want to focus on animal husbandry, go ahead. If you want to kill deathclaws, go ahead. We can each enjoy the game as we see fit. Everyone wins.

And isn't that the beauty of free people transacting as they see fit? My pleasure does not come at the expense of yours, nor yours mine?

I have to admit. I am fairly excited about this title. The custom power armor looks to be quite an improvement over the slim scavenging we had in New Vegas.

Pixellated Peace

At Popehat, Clark takes an orbital view of the recent dust-up over ethics and morality in the video game industry. His point: the scuffle is just the latest battleground between the two factions that have been duking it out since time immemorial. Call it blue vs red, freedom vs authority, or forager vs farmer if you want, but it's just more of the same. Meet the new boss, same as the old boss.

Curiously omitted is some pretty good news; as far as deep cultural conflicts go, this tempest-in-a-teakettle is remarkable for being so peaceful. Yes, there's a lot of hot rhetoric going around, and some threats of violence serious enough to inconvenience some people, but there is a pointed lack of the taking up of arms or indeed, much of anything that could rouse partisans to do much else besides lose a little sleep as they incessantly tweet he-said/she-said vitriol at each other.

Has the great increase in public luxury shifted the battlefield of deep social conflicts to Mountain Dew and Chee-to stained keyboards? Is this explosion of peace a happy result of the great bounty brought by a massive boost to the volume of trade available to the common man? If so, is it not in the interest of global peace to trade felicitously with members of all tribes on earth so that they might beat their swords into oculus rifts?

What could be more euvoluntary than to distract rowdy, otherwise murderous crowds of angry young men with 1080p boobs at 60 fps? Drop trade barriers, spread peace through commerce. We may not be able to quash discontent, but if GamerGate has shown us anything, it's shown us that discontent can be effectively neutered. Let that put a spring in your step, and a smile on your lips.

Social Capital or: How I Learned to Stop Being a Jerkass and Love the Gaming Industry

Ronald Coase's great contribution to the theory of exchange is that bargaining over conflicts produces results consistent with the First Welfare Theorem: with a non-null bargaining set, disputants should be able to settle on a mutually-satisfying outcome with no Pareto-improving offers to be made.

Ideally.

In practice, what typically gets in the way is pigheadedness, pride, churlishness, grudges... politics if you will. Or sometimes, there really is no mutually-satisfying resolution available.

Politics is a skill. And like any skill, it requires practice. So when I read this overview of (can we please stop with the tired suffix already?) GamerGate, I couldn't help but think of Wednesday's post. What should have been a minor tiff over something as insignificant as video game journalism and inclusiveness in a hobby that is chiefly enjoyed in the privacy of one's own home has bafflingly erupted into a full-blown row including rape and death threats. It is difficult to reject the hypothesis that some elementary conflict resolution skills would greatly improve the conduct of this melee.

Video games are stereotypically a pursuit of the young. I don't see too many graybeards embroiled in the gnashing of the teeth on display here. If this is a cohort problem rather than a problem of excessive callowness, then the zero-tolerance authoritarianism ascendant these two decades or so hence have done our politics no favors.

#GamerGate is merely the vanguard. Winter is coming.

Don't Fear the Reaper Bot

Via VG247, a Bulgarian entrepreneur nets himself over $100,000 in 2013 by auction house arbitrage.

ATSRTWT

Condensed version: he gets the script for a bot from a friend. He modifies that script to scour the in-game real-money auction house. The bot buys undervalued items, then re-sells them at higher prices. He pockets the difference.

Contrast Turner:

I say that I am useful to the king, and to ealdormen, and to the rich, and to all people. I ascend my ship with my merchandise, and sail over the sea-like places, and sell my things, and buy dear things which are not produced in this land, and I bring them to you here with great danger over the sea; and sometimes I suffer shipwreck, with the loss of all my things, scarcely escaping myself.

What things do you bring to us?

Skins, silks, costly gems, and gold; various garments, pigment, wine, oil, ivory, and orichalcus, copper, and tin, silver, glass, and suchlike.

Will you sell your things here as you brought them here?

I will not, because what would my labour benefit me? I will sell them dearer here than I bought them there, that I may get some profit, to feed me, my wife, and children.

"Cherokee Brook" makes no improvements to the in-game items he resells. He doesn't even take them across the wide, winedark sea. He buys low and sells high. He exploits sellers' naivete about the "correct" price.

Both of the exchanges his bots make, the buying and the selling, are consistent with the welfare theorems of economics; each party is better off for having made the trade. But C.B. has access to better information, so does this edge mean that the exchange can no longer be counted as euvoluntary?

Note that his bots' prescience didn't extend to other types of bots. Gold farming scripts caused great inflation, meaning that he was stuck trying to sell goods for which there were no buyers.

Interesting that. It's almost a metaphor for something.

Please refrain from the "too bot to fail" jokes, people.

Pay to Win

"Free to play means pay to win." In an inversion of a classic gaming trope, Free-to-Play games often, for a few dollars more, allow newer players to buck their natural disadvantage and pwn, instead of being pwned. This breeds conflict, as veteran gamers with hundreds (thousands, even) of hours dedicated to honing split-second reflexes and lightning-fast heuristic calculations find themselves hopelessly outgunned by some sweaty neckbeard with mommy's credit card. In Hansonian terms, the elite gamers are akin to highly skilled foragers who are very good at hunting under egalitarian terms; the only asymmetries are in skills developed through practice (and I encourage you to watch the finals of a Starcraft tournament so you can judge for yourself how refined are some of these skills). In a FtP game, microtransacting players who buy powerful gear are like farmers who've discovered the cheat code of "let's just build a fence around these goats instead of running around the woods all the dang time."

The foragers in this metaphor resent the farmers for being contemptible cheats (judging by the ample scorn heaped upon "casuals" by the more dedicated gaming community), while the farmers send valuable signals to developers.

Valuable signals? Hear me out. Economics isn't always 100% consistent, and a great many economists disagree on a great many things, but one point of large agreement is something called the "equimarginal principle." That's a jargon-y way of saying that people economize on costs, that they strive to get the biggest bang for their... well, it's misleading to say "buck"... for the value of what they give up, be it time, effort, attention, or claims on other resources. Sometimes it's a buck, but sometimes it's just whatever else they might have been able to do. People perform their "felicific calculus" and pursue the greatest reward at the lowest cost. Since everyone's got a different schedule of opportunity costs, microtransactions offer game designers the chance to let players reveal their margins. For some folks, grinding 100 hours for loot is hunky-dory: perhaps they don't have much else to do with their time. For others, dropping $10 to get the irl cash store version is more sensible.

And the proliferation of FtP games means that the economic profits are sure to be wrung from the system. Competition and all that, don't you know. Of course, this is great news for serious gamers. Diminishing returns for FtP games means that traditional, subscription-only multiplayer titles still have a future. While the FtP market is quickly becoming saturated (we might even be a few years past the threshold on that), serious gamers might well find solace within titles that raise a paywall to keep casuals out. Competition permits, even encourages diversity.

Are FtP games euvoluntary? So long as developers aren't hampered from responding to market signals, I'd say yes. The alternative is to try to cram the genie back into the bottle, and that seldom ends well for anyone. Especially the genie.

Gold Farming

In order to provide a richer gaming experience, many online games that have people from around the world playing in the same persistent world (commonly known as MMO, or massively multiplayer online games) feature crafting systems, where players can harvest raw in-game materials and transform them into useful in-game items. In many (not all) MMOs, there is a direct opportunity cost for resource gathering: time spent collecting and crafting is time not spent fighting the game's foes. 

And where there are opportunity costs, there are often bargaining arrangements to be made to reduce these costs. Enter the gold farmer. 

A gold farmer will spend hours and hours and hours monotonously doing the same interminable task over and over and over again (like killing low-level mobs to collect leather) for conversion and sale to more traditional players in exchange for real-world currency. 

The typical reaction to gold farming (from ordinary players) is a mixture of pity, contempt, and dismissive indifference. The margins on gold farming are razor-thin, which should be unsurprising given rumors of conscripted prison labor. 

Is gold farming euvoluntary? One way to look at it is that (relatively) well-heeled players are exploiting poor "players" (you'll find that most non-casual players will adamantly refuse to consider gold farmers to be actual game players) to obtain game items without the toil expended by honest players. It's almost a double offense: not only do the dilettantes get gear they didn't have to grind for, but they did it by taking advantage of poor Chinese (or so goes the stereotype) workers clicking away in 18-hour shifts in rooms full of computer banks and notably devoid of air conditioning. Again, so the stereotype goes. BATNA disparity. What's more, people buying gear from gold farmers fail to develop the skills needed to play the game properly in some of the more challenging areas. In another context, they'd be called "poseurs."

But the same economic analysis that applies to sweatshops should apply to gold farming as well. People turn to gold farming because it's the best option among the competing alternatives. Even in the prison situation, it's probably better to click a mouse button than to spend that time turning big rocks into little pebbles. And for the faux gear-hungry secondary market shoppers? A n00b is a n00b, even with +5 devout greaves or whatever. If you find yourself galled by someone who simply paid cash for the best gear in the game, consider carefully exactly what aspect of that makes your gameplay less enjoyable. If you find that your answer lands somewhere near "envy," you might be faced with an opportunity to work on your ethical development. 

The same goes for developers. There might be some legitimate reasons to regulate (or even eliminate) secondary markets, like PvP balance or whatever, but if high moral dudgeon starts to creep in, please consider carefully what alternatives you might be subjecting suddenly-unemployed gold farmers to. 

Microtransactions

Warning: salty language.


Question: are microtransactions euvoluntary? Coercive? The psychology is similar to addiction: tease players with a little shot of dopamine just out of reach, then charge them for the pleasure of fulfilling an artificial goal. The early egregious examples of DLC shenanigans were patently absurd (functionless horse armor in TES IV), but as this video demonstrates, developers (ahem EA) have turned the corner, turning microtransactions into devious exploitation devices.

And, correctly, Nerd^3 echoes Tullock. To avoid getting caught in this web, don't start playing in the first place.

Is there good, properly euvoluntary microtransactions? Sure. Add-on campaigns fit the bill. The DLC for Borderlands 2 is a perfect example. The DLC for Bioshock Infinite would also count if the doors for Burial At Sea Part I weren't broken (but I digress).

There's almost certainly no single perfect business model here. It seems to me that game developers are prone to the same sort of heuristic errors that plague the rest of us. Think of the above video as evidence of supply-side bubble formation. Wait for the worm to turn, people.

Exchange: A Nice Analysis in an Unexpected Context

YH&C has a very cool post on Gears of War 3.

Excerpt:

Gears of War 3 is an Xbox game that retails for $60. In some online multiplayer, there are some purely aesthetic customizations one can make to their character, the relevant one here being "weapon skins," where the guns players uses can have different paint jobs or animated graphics to make their pretend guns dazzle. Some of these weapon skins are unlocked by completing specific tasks in the game, but a set of 22 was made that players have to pay real money to use.

For $3, you can unlock a static paint scheme like tiger stripes or a flower pattern for all five starting weapons. For $4, you get an animated graphic, like an ocean ripple, for all five. For $15, you can unlock all 22 skins for one of the five weapons, and for a poorly-spent $45 you can unlock each and every one of them.

Predictably, there has been a lot of complaints on the Internet, most of it whiny. The best articulated criticism I have seen is from a level-headed competitive player named K.L. who made a very reasonable video saying this isn't the end of the world, but he doesn't like the policy of incorporating money-making tactics normally reserved for freemium games into a retail game. He hit all the normal points, such as making people pay to use content on the disc, something I don't have a problem with.

Let me start by saying K.L., or "arCtyC" as he likes to be called, has hit upon a gut feeling I share. There is something disappointing about having to pay to use these fun weapon skins. He also does a good job of stressing that this is an entirely voluntary transaction.

Paying to make your pretend guns prettier goes beyond voluntary and satisfies all of the criteria of Michael Munger's "euvoluntary" or "truly voluntary" criteria. Epic Games created the skins, has the legal right to sell them and customers know what they're getting. The weapons skins have no impact on weapon performance, and there are still zero-dollar unlockable weapon skins, so players are not punished for failing to buy them. There is no coercion vaguely associated with this transaction.

So that leaves one criteria to be considered euvolunary. How terrible is the Best Alternative To A Negotiated Agreement, or BATNA? If not buying a product will result in the death of a consumer, the BATNA differential is said to be very large.

I have trouble imaging a smaller BATNA than not being able to use a pretty pretend gun without paying $3. Sure, it's foolish for most people to pay $45, and I imagine most people chose not it, but a lot of people paid an extra $90 to have their copy of the game bundled with a cheap desk statue, a few trinkets, fake documents and a few different weapon skins and aesthetic downloads. For some reason, offering special editions of games and movies to consumers doesn't draw the same complaints, but the same elements are all there.

Very interesting, and an application I would not have thought of. GoodONya, Michael.