Nav: Home

Economics study finds volume discounts don't increase profitability for video game

July 08, 2016

Discounts tied to buying large quantities of virtual goods have little impact on profitability and do not increase the number of customers making purchases, according to economists at the University of Chicago.

The findings come from a field experiment of more than 14 million players of mobile games by King Digital Entertainment, maker of Candy Crush Saga. For the study, researchers offered a range of quantity discounts on virtual goods, which players buy for use within a video game.

The results of the study by UChicago economists Steven Levitt, the William B. Ogden Professor of Economics, and John List, the Homer J. Livingston Professor of Economics, were published on July 5 in Proceedings of the National Academy of Sciences. Co-authors of the paper were Susanne Neckermann, an assistant professor at Erasmus University, and David Nelson of King.

"I think there is a lot to gain from partnerships between cutting edge firms and academic researchers," Levitt said. "Many firms are now doing randomized experiments, but mostly testing incremental changes. This project was an example of using experimental methods to test a much more radical shift in strategy."

The researchers and King conducted the field experiment together, with the results made available to the scientific community. Such partnerships remain rare, but hold increasing value in an era of big data in which companies generate large, real-time data sets.

"A good way to define firms is that they are a black box where interesting economic facts reside," List said. "Experimental partnerships with firms allow scientists to unlock these deeply held mysteries."

King's games for smart phones, tablets and other devices are free to users. The company generates revenue through in-game purchases such as gold bars, which can be redeemed to advance more quickly through a game.

Traditionally, King has used a simple pricing strategy with minimal discounts for buying large quantities of gold bars. For the study, researchers designed a series of quantity discounts, which were offered to different groups of customers for a three-month period. In the most extreme intervention, players were offered a more than 60 percent discount for intermediate-size purchases and a more than 70 percent discount for large-size purchases.

Analysis of players' responses to the discounts show that:
    -- Quantity discounts had virtually no effect on the share of players making a purchase.

    -- Customers who made small and infrequent purchases tended to spend more when offered the largest quantity discounts, while customers who were already large buyers tended to spend less. The net result was no impact on revenues or profit.

    -- Data suggests some consumers who would have made small purchases were discouraged from doing so when faced with large quantity discounts.

The researchers said their findings challenge traditional theoretical thinking on quantity discounts, particularly that such practices increase company profitability. The experiment came at essentially no cost to King, requiring a minimal number of employee hours to execute.
-end-


University of Chicago

Related Economics Articles:

Research group focuses on economics of transportation needs for rural elderly
A multidisciplinary team of researchers is examining economic issues associated with providing transportation for the rural elderly and other socially disadvantaged populations.
Understanding decisions: The power of combining psychology and economics
A new paper published in the Proceedings of the National Academy of Sciences shows how collaborations between psychologists and economists lead to better understanding of such decisions than either discipline can on its own.
Three Harvard experts explain how economics can shape precision medicines
Many public and private efforts focus on research in precision medicine.
Denmark to honor late Nobel Prize winner Dale T. Mortensen
Three years after the passing of Nobel Prize winner Dale T.
Economics made simple with physics models
Both physical and economic phenomena may possess universal features that could be uncovered using the tools of physics.
More Economics News and Economics Current Events

Best Science Podcasts 2019

We have hand picked the best science podcasts for 2019. Sit back and enjoy new science podcasts updated daily from your favorite science news services and scientists.
Now Playing: TED Radio Hour

Anthropomorphic
Do animals grieve? Do they have language or consciousness? For a long time, scientists resisted the urge to look for human qualities in animals. This hour, TED speakers explore how that is changing. Guests include biological anthropologist Barbara King, dolphin researcher Denise Herzing, primatologist Frans de Waal, and ecologist Carl Safina.
Now Playing: Science for the People

#534 Bacteria are Coming for Your OJ
What makes breakfast, breakfast? Well, according to every movie and TV show we've ever seen, a big glass of orange juice is basically required. But our morning grapefruit might be in danger. Why? Citrus greening, a bacteria carried by a bug, has infected 90% of the citrus groves in Florida. It's coming for your OJ. We'll talk with University of Maryland plant virologist Anne Simon about ways to stop the citrus killer, and with science writer and journalist Maryn McKenna about why throwing antibiotics at the problem is probably not the solution. Related links: A Review of the Citrus Greening...